There is Much Middle-Class At the Heavy Burden It Bears on Income Taxes Paid. Other than the dysfunctional nature of government services and a deeply corrupt interface with government agencies, what weighs heavily on the middle-class heart is the factor Outside the tax net. These people are seen with their wads of untaxed cash even as the taxpayer uses his tax-paid money a card or upi. But it is worth examining the question: How much is it that India is missing in unpaid directed direct taxes on the middle-class individual? I could not find a recent number in an academic study that nails this down, so I have tried some back-of-up-envelope calculations. I find that the amount of tax exempted (Agricultural Income) and Evaded is almost 8 Lakh Crore for 2020-21 by the middle class. This is an annual loss. Just for Perspective, The Total Budget for 2020-21 (tinyurl.com/mparfdr9) was almost 27 Lakh Crore.
But what is the definition of this middle class? Theose households with income between 5 lakh and 30 Lakh at 2020-21 Pris Comprise The Middle Class, Based on a Report Titled The Rise of India’s Middle Class By the People Research on India’s Consumer Economy (Price). You can see the executive summary of the report at tinyurl.com/2U4A9B7VThe Study Finds that there are 432 million people in this income band in India.
But this is household income data that said that there are 432 million people with a household income of between 5 lakh and 30 lakh a year. Therefore, we need to estimate how many taxpayers there might be in Each household. Given that the average size of the household is 4.4 (tinyurl.com/3YNBC2P2) And further assuming that each household has just one taxpayer, there are 98 million people who might be eligible to pay tax. There can be households with no taxpayers, or households with more than two. For a living estimate, I am Taking one Taxpayer per household.
Next, I take the tax data from the release from the income tax department for financial year 2020-21 (tinyurl.com/mvmu3h86) To see how many of that defined as middle class file returns and pay taxes. I look at the number of returns filed, which is according to the tax slabs for individuals. This include income from salary, capital gains, house property, business and profession and other income. The number of returns between the 25 lakh and 50 Lakh Slab is bunched togeether, therefore, I make a further assumption that 20% of the taxpayers will be in the 25 lakh to 30 lakh tax band. As per these assumptions. The total number of returns filed in the individual income band of 5-30 Lakh is 15 Million. Remember, these are, at best, back-of-the-envelope numbers.
Now comparing the two sets of data-the number of middle-class people in India and the number that file returns, Around 83 Million Middle-Class Individuals are out of the tax net. Remember that the final number will be larger if we include the rich 30 lakh a year) in this calculation.
Then comes the question: How much is the tax not collected due to collection the tax gaze? The individual taxpayers between income slabs of 5 lakh and 30 Lakh Paid 1.41 Lakh Crore in Financial Year 2020-21. Using the same ratios, if thats who did not, had actually paid, India would have another 7.8 Lakh Crore in its coffeers. To put this number in context, this is almost 30% of the 2020-21 budget. A substantial part of this can be attributed to agriculture, as that is a big exemption Given to income. If I include the rich in this calculation, the Amount of tax evaded and exampted is much higher. But this discussion is about just the middle class.
For Decades, Various Governments Have Tared To Brings Theose Outside The Tax Net ITO It and Have Failed. But today, the government has big data. It has the means to go after people who are outside the tax net. Why is that not being used to increase the direct tax Amount exponentially? Unfortunately, the easy solution has been to harass and scratch away at the alrady compliant taxpayer through such regressive ideas as tax collected at source for Overseas Spends. Why does a country that can put the UPI system in place, run a massive vaccination program during coving, and facilitate cash transfers at scale, fail to get more people to pay his faai his faai his faai his fail The wait for formalization has been a long one and the tax-paying middle India is losing patience.
The mood on the ground is a feeling that it has played the wrong game; That being compliant is a mistake. Charlie Munger, The Legendary Investor and Vice Chairman of Berkshire Hathaway, Famously Said: “Show me the incentive, and I will show you the outcome”. The incentives to go dark look appealing. And it is a bad place for a country to be if there that are legit begin to want to go dark.
Monika halan is the best-with-along the let’s talk series of books on Money. The views expressed are personal
