Tax Cuts A Sustainable Path To Development?

With less than 10% of taxpayers shouldering a significant portion of the government's revenue, the growing disparity in income and tax burden must be addressed. Policymakers must focus not only on tax concessions but also on broadening the tax base, curbing evasion, and ensuring equitable fiscal policies that drive sustainable economic growth

When Finance Minister Nirmala Sitharaman announced that there would be no tax on an annual income up to Rs 12 lakh while presenting the Union Budget 2025-26 in the Lok Sabha on February 1, 2025, the august House was in the grip of deafening sound of bench thumping coming from the treasury side. From the other side of the bench, there was no such response except a few smiling faces as was seen on the screen of an elite news channel I was watching at that moment. For many years, I have not been watching TV news channels. Since I had been invited with due respect to join a post-Budget discussion by an industry organization, I was constrained to watch the live telecast of the Union Budget presentation. The entire debating team of the TV channel was on cloud nine at the announcement of income tax concession. It is a big bang budget – they cried in unison.

Absolutely nothing wrong in their way of reacting to a government decision. It is our prerogative. Unfortunately, we do not show similar kind of enthusiasm in dissecting welfare and affirmative measures of the Central and state governments. We never bother to discuss their outcome or their positive impact on the targeted beneficiaries’ ease of living in particular and others in general. The element of inclusivity has always been a criminal miss in the institutionalized national media discourse and writing as well. It is perhaps the only reason that has galvanized and democratized the emergence and growth of social media platforms in our country. Let me admit here that I do watch many YouTube channels being run by some bright journalists of the country, who did not get their due reckoning and acceptance in the elite media landscape because of multiple reasons and the most prominent among them being the total lack of equity and inclusivity in their recruitment policies.

Coming back to the core focus, every year there will be some kind of concessions for individuals in terms of income tax rebate or in other respects in the Union Budget. It is a dynamic proposition. Every time, some of us will be a beneficiary of some public policies. Maybe ten years down the line, there will be only two or three income slabs for paying the tax as the government starts earning more from indirect taxation and other sources. The point we need to ponder over is the number of direct taxpayers in the country. As per the time series data released by the Central Board of Direct Taxes (CDBT), there were 10.4 crore taxpayers in the assessment year (AY) 2023-24, up from 5.7 crore in 2014-15. A taxpayer is defined as a person who either has filed a return of income for the relevant AY or in whose case tax has been deducted at source in the relevant financial year but the taxpayer has not filed the return of income. Total direct tax receipts in 2023-24 were at Rs 19.6 lakh crore, up 182 per cent from nearly Rs 7 lakh crore in 2014-15.

According to another set of income tax return statistics for AY 2023-24, 75.46 million salaried individuals filed tax returns. Out of these, 58.92 million individuals had annual salary income less than Rs 7 lakh, thus giving them exemption from any tax. This translates to 78.1 per cent of salaried taxpayers paying no tax. This calculation includes individuals who reported zero salary income - 37.5 million and those with income up to Rs 7 lakh - 21.4 million. Taking the AY 2023-24 data as base, if the revised Rs 12 lakh rebate limit is to be considered, then the number of individuals exempted from paying income tax would further rise to 67.76 million. This would mean that 89.8 per cent of salaried individuals would not have any tax liability. If we consider the Rs 12.75 lakh as rebate limit, then the number of individuals exempted from paying income tax would be 69.22 million. This would mean that 91.7 per cent of salaried individuals would not have any tax liability.

I would not like to comment on the social dimension of 91.7 per cent salaried individuals, who may not have any tax liability but we must look at the source of the Central Government’s income. According to the Budget Estimates for the year 2025-26, income tax including securities transaction tax – a tax levied on the purchase or sale of securities listed on recognized stock exchanges in India is applicable to transactions involving equities, derivatives, and equity-oriented mutual funds – will contribute to the tune of 22 per cent of the Centre’s revenue generation. The amount is quite huge, which comes from less than 10 per cent of taxpayers in the country. So, one can imagine the colossal annual income they have. This monstrous concentration of income in a few per cent of the country’s people must be taken as an alarm bell by the policy makers. One can also try to find out the massive amount of money being accumulated by those evading direct or indirect tax – that is Goods and Service Tax (GST) - which is collected from the consumers but is not passed on to the government. I would like to share here some observations made by former Finance Minister Late Shri Arun Jaitley ji in his address at the South Asia Institute’s Mahindra Memorial Lecture at Harvard University on October 11, 2017, which was excerpted and carried in a prestigious news portal. It reads: “The tax base is extremely, extremely narrow. This year, in my Budget speech, I had put forward the data relating to the previous year’s indirect taxation...A country of 1.25 million people with a very narrow tax base -- and effectively we had a tax exemption limit of Rs 2.5 lakh; you had a small amount of taxes being paid up to Rs 5 lakh -- beyond Rs 5 lakh, when the real taxes started coming, the total number of people (and I am not including companies in this, companies are separate) who paid those taxes were 78 lakh. Of these 62 lakh were those, who were salaried. So their taxes were compulsorily deducted. So this entire universe of individuals, business, trade, shopping arcades, lawyers, doctors, architects, professionals, people earning income from rent... who were paying more than Rs 5 lakh, was 17 lakh. And therefore, the tax base itself was extremely small.”

The challenge at hand is not merely the vast and alarming disparity in income levels across different sections of society but also the pressing need to curb tax evasion, particularly among individuals who earn substantial amounts - often in lakhs - on a monthly basis. It is essential to implement stringent measures to ensure that such individuals accurately declare their earnings in official business records, thereby ensuring transparency and compliance with tax regulations. Beyond enforcement, a crucial aspect of this effort is to cultivate a sense of duty and accountability among high-income earners and professionals, encouraging them to actively contribute to the nation’s economic development. By fulfilling their tax obligations, they will become responsible stakeholders in shaping a more inclusive and equitable Bharatvarsh, where resources are mobilized effectively for the welfare and progress of all citizens.

(The writer is a senior journalist, author and columnist. The views expressed are strictly his personal)