The government recently released time-series data on income tax. While much of the data was known, it sparked off renewed debates on the level of taxation, the small numbers of people paying taxes, adequacy of our tax rates etc. The junior minister of Finance, Jayant Sinha weighed in on the debate in an interaction with journalists/economists, hosted by Swarajyamag. He made a few key observations, some of which merit closer scrutiny.
Firstly,tax rates. The minister would have us believe that India is a "moderate tax" country with peak tax rate @ ~35%, lower than most comparable ones. The examples he quotes? US (25 times our percapita income), UK (20 times). For good measure of comparability, he quotes China's 45% peak tax rate, forgetting perhaps that China's per capita income is 4.5 times India's!
Comparing more comparably, India's peak income tax rates are at the upper end of Asian levels. From 25% levels in Malaysia/Sri Lanka to 35% in Vietnam/Thailand, Indian peak tax-rates are more than fair in the context of our geography and per capita income.
1. The number of people filing tax-returns isnt as low as the headline number (~4.5 crores) suggests, its a reasonably fair reflection of our economic structure.
2. Levels of tax-rates in India are "moderate", lower than rest of the comparable world.
3. Most importantly, its a mistaken notion that the middle class takes up a disproportionate part of the tax burden, as 50% of the taxes are indirect taxes (that impact all, poor disproportionately), and income tax-to-GDP ratio is only ~22%.
Well, banality of headline numbers is de rigeur with politicians, but one expected somewhat better from Jayant Sinha, with his significant experience in money management. He is right on the first point, ie, the number of tax-payers, once adjusted for agricultural income (and bracketed up on households), is a respectable number. Unfortunately thats where the good analysis ends.
Firstly,tax rates. The minister would have us believe that India is a "moderate tax" country with peak tax rate @ ~35%, lower than most comparable ones. The examples he quotes? US (25 times our percapita income), UK (20 times). For good measure of comparability, he quotes China's 45% peak tax rate, forgetting perhaps that China's per capita income is 4.5 times India's!
Comparing more comparably, India's peak income tax rates are at the upper end of Asian levels. From 25% levels in Malaysia/Sri Lanka to 35% in Vietnam/Thailand, Indian peak tax-rates are more than fair in the context of our geography and per capita income.
In a breathtaking instance of a bizarre non-sequitur, the minister added that countries like Singapore have low tax rates because they dont have an army! For a government thin on academic talent, Jayant Sinha is an exception, hence its doubly surprising how he missed that Singapore one of the highest defence-to-GDP ratios in Asia!
Now to the contribution of the "middle class" to the overall tax collections of the government. the central government's tax pie looks something like this.
Source: Union Budget 2016-17
Again, banality of the headline number strikes. Only 22% of total central taxes is contributed by income tax. another ~30% is corporate tax, and the balance, a disproportionate (by global standards) 50% is from indirect taxes. Indirect taxes ostensibly are regressive, as has non-linear, asymmetric impact on household incomes (in other words, poorer you are, greater is the impact of the tax levied for buying the same packet of cigarette).
But as usual, the headline number masks the reality.
There are three major components of indirect taxes today are Excise, Customs and Service taxes.
A CAG report from 2013 has good data on the contribution of various commodities and service categories towards excise and service taxes. It is clear from data that indirect taxes, to a large extent, and directed primarily at the "Middle Class", and while not being as progressive in nature as income taxes, are largely borne by the 120-150 million folks that comprise the middle class of India. Lets call this the "Middle Class Tax", or MCT.
To start with, ~50% of all excise taxes are due to petroleum products, primarily petrol and diesel. In other words, ~10% of Excise taxes come from motor fuels. Petrol comprises ~18% of the motor fuel mix, while diesel comprises 82%. As per AC Nielsen, around 13% of all diesel sales, and 100% of all petrol sales are accounted for by private cars and 2-wheelers. Through elementary maths, this means that ~30% of all motor fuel taxes (or 15% of excise taxes = 30%X50%) can be classified as MCT.
Second, Motor vehicles contribute 6% to the central excise kitty - another tax that can be entirely classified as MCT (given that vehicle ownership is termed by politicians to be a "middle class luxury").
Third, service taxes. Its the fastest growing head of tax revenues, and every year new categories of services are included in its ambit. What are the key categories contributing to this kitty today? Check carefully the components (from the same CAG report referenced above). Financial services, restaurants, telecoms, business auxiliary services, insurance premia, construction&renting of property, maintenance & repairs - in short, barrign a few its mostly a laundry list of services consumed in large quantities essentially by the Middle Class. While its somewhat tough to put a precise number, going by the contributing category heads, it would be safe to assume a 60% contribution of MCT in the service tax kitty, in other words, ~8.4% of aggregate central taxes.
Last, customs taxes. Bulk of the contribution to customs come in from industrial intermediates and capital goods. From pure value terms, it would be difficult to directly attribute a progressive direct burden on the middle class alone from these levies. Hence, it would be fair to take a 0% MCT on the same.
Net net, therefore, how does it look?
In other words, MCT accounts for 34% of ALL central taxes directly. This isnt accounting for the share of unattributeable indirect taxes as well as local/state taxes that are contributed by the middle class.
Safe to say that the middle class bears a much larger than its fair share of the nation's taxes, while encountering a tax rate that is at the upper end of Asian levels, and a tax administration that is at the lowest end of the same levels!
A data-challenged minister shouldnt get away with saying anything else!
| Tax head | INR Crores | % contribution to total |
| Income Tax | 353,173 | 22% |
| Corporate Tax | 493,923 | 30% |
| Excise | 318,669 | 20% |
| Customs | 230,000 | 14% |
| Service Tax | 231,000 | 14% |
Again, banality of the headline number strikes. Only 22% of total central taxes is contributed by income tax. another ~30% is corporate tax, and the balance, a disproportionate (by global standards) 50% is from indirect taxes. Indirect taxes ostensibly are regressive, as has non-linear, asymmetric impact on household incomes (in other words, poorer you are, greater is the impact of the tax levied for buying the same packet of cigarette).
But as usual, the headline number masks the reality.
There are three major components of indirect taxes today are Excise, Customs and Service taxes.
A CAG report from 2013 has good data on the contribution of various commodities and service categories towards excise and service taxes. It is clear from data that indirect taxes, to a large extent, and directed primarily at the "Middle Class", and while not being as progressive in nature as income taxes, are largely borne by the 120-150 million folks that comprise the middle class of India. Lets call this the "Middle Class Tax", or MCT.
To start with, ~50% of all excise taxes are due to petroleum products, primarily petrol and diesel. In other words, ~10% of Excise taxes come from motor fuels. Petrol comprises ~18% of the motor fuel mix, while diesel comprises 82%. As per AC Nielsen, around 13% of all diesel sales, and 100% of all petrol sales are accounted for by private cars and 2-wheelers. Through elementary maths, this means that ~30% of all motor fuel taxes (or 15% of excise taxes = 30%X50%) can be classified as MCT.
Second, Motor vehicles contribute 6% to the central excise kitty - another tax that can be entirely classified as MCT (given that vehicle ownership is termed by politicians to be a "middle class luxury").
Third, service taxes. Its the fastest growing head of tax revenues, and every year new categories of services are included in its ambit. What are the key categories contributing to this kitty today? Check carefully the components (from the same CAG report referenced above). Financial services, restaurants, telecoms, business auxiliary services, insurance premia, construction&renting of property, maintenance & repairs - in short, barrign a few its mostly a laundry list of services consumed in large quantities essentially by the Middle Class. While its somewhat tough to put a precise number, going by the contributing category heads, it would be safe to assume a 60% contribution of MCT in the service tax kitty, in other words, ~8.4% of aggregate central taxes.
Last, customs taxes. Bulk of the contribution to customs come in from industrial intermediates and capital goods. From pure value terms, it would be difficult to directly attribute a progressive direct burden on the middle class alone from these levies. Hence, it would be fair to take a 0% MCT on the same.
Net net, therefore, how does it look?
| Tax head | INR Crores | % contribution to total | MCT contribution |
| Income Tax | 353,173 | 22% | 100% |
| Corporate Tax | 493,923 | 30% | 0% |
| Excise | 318,669 | 20% | 21% |
| Customs | 230,000 | 14% | 0% |
| Service Tax | 231,000 | 14% | 60% |
| 34% |
In other words, MCT accounts for 34% of ALL central taxes directly. This isnt accounting for the share of unattributeable indirect taxes as well as local/state taxes that are contributed by the middle class.
Safe to say that the middle class bears a much larger than its fair share of the nation's taxes, while encountering a tax rate that is at the upper end of Asian levels, and a tax administration that is at the lowest end of the same levels!
A data-challenged minister shouldnt get away with saying anything else!
