Opposition leaders have raised concerns over the evolving tax landscape in our country. While tax compliance has undeniably increased, a noticeable gap has emerged between the ultra-rich and the middle class, a disconcerting trend apparent in the latest income tax returns (ITR) data. Policymakers find themselves grappling with this worrisome phenomenon alongside the pressing need to address another tax-related challenge — a substantial portion of eligible taxpayers fails to file their tax returns.
These developments raise concerns about economic inequality, social mobility, and the overall well-being of our society. The broader compliance might not necessarily translate into improved financial conditions for our citizens.
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Rising income inequality
The mounting income inequality poses a significant concern for policymakers across the globe. It signals that a disproportionate share of wealth is concentrated in the hands of a select few individuals. The collective wealth of India’s top 100 richest individuals surged to a staggering $660 billion (Rs 54.12 lakh crore) in 2022, with the number of billionaires in our nation rising from 102 in 2020 to 166 in 2022.
This alarming trend has not escaped the attention of global organisations like Oxfam, which highlighted India’s escalating income inequality. According to a January 2023 report, a mere 5% of individuals own over 60% of the country’s wealth. The report, aptly titled ‘Survival of the Richest,’ asserts that imposing a modest 2% tax on India’s billionaires’ entire wealth could provide the requisite Rs 40,423 crore for the nutrition of malnourished individuals in our nation for the next three years, underscoring the stark disparity between the wealthy elite and the marginalised.
The widening rich-poor gap assumes greater significance in light of the Sustainable Development Goals (SDGs) which seek to reduce income inequality (SDG 10) and create a more equitable world by 2030. However, when individuals are trapped in poverty, they often grapple with multiple challenges like food insecurity, malnutrition, inadequate healthcare, and limited access to education. Children from impoverished families face barriers to education, and women from such backgrounds frequently confront discrimination and violence.
Organisations like the International Monetary Fund (IMF) and the World Economic Forum (WEF) have also issued warnings about the perils of escalating income inequality. India harbours the world’s largest population of impoverished individuals, numbering 228.9 million. These individuals face a gamut of hardships, including hunger, unemployment, inflation, health crises, and the inability to afford basic necessities for survival.
An analysis by the Organisation for Economic Co-operation and Development (OECD) revealed that in emerging economies like India, prolonged periods of robust economic growth have succeeded in elevating millions of people out of absolute poverty. However, the challenge arises when the benefits of this growth are not equitably distributed, leading to a surge in income inequality.
Addressing this disparity necessitates taxing affluent individuals more robustly. Paradoxically, in 2019, the Union government chose to reduce corporate tax rates from 30% to 22% while augmenting the Goods and Services Tax (GST) and excise duties on diesel and petrol. The failure to levy fair taxes on the wealthy and corporations exacerbates inequality, forcing governments to resort to heavier taxation on the broader population, as highlighted in the Oxfam report.
At an all-India level, the bottom 50% of the population ends up paying six times more in indirect taxes as a percentage of their income compared to the top 10%.
Furthermore, bolstering social safety nets, such as free ration schemes, becomes imperative when such a glaring chasm exists within our society.
Insights from income tax data
Recent data released by the income tax department for assessment years 2019-20 to 2021-22 offers valuable insights into the evolving tax landscape. The ITR data reveals that the average gross total income of the top 1% of taxpayers has surged by 42% since 2013-14, while the average gross total income of the bottom 25% of taxpayers has witnessed a 58% increase. This underscores the troubling trend where the affluent are amassing wealth at a faster rate than the less privileged.
In the assessment year 2021-22, 6.75 crore taxpayers filed income tax returns, marking a 5.6% increase compared with the previous year’s figure of 6.39 crore. Additionally, around 2.1 crore taxpayers paid taxes but did not file returns. Over a nine-year period, from Assessment Year 2013-14 to Assessment Year 2021-22, individual taxpayers recorded a substantial 90% increase in filed returns. The tax department attributes this growth to measures taken to expand the tax base and reports growth in the gross total income across different income groups.
In the assessment year 2021-22, approximately 67,970 individuals in India disclosed salary incomes exceeding Rs 1 crore. Among them, 16 individuals reported salaries ranging from Rs 100 crore to Rs 500 crore during the financial year 2020-21. Furthermore, returns filed by individual taxpayers exhibited remarkable increases of 295% and 291% in the gross total income ranges of Rs 5-10 lakh and Rs 10-25 lakh, respectively, from Assessment Year 2013-14 to Assessment Year 2021-22. This suggests a positive trend of individual taxpayers migrating to higher income brackets.
Global perspective on income inequality
Globally, income inequality exhibits significant variation, with Europe being the most equitable region and the Middle East and North Africa (MENA) ranking as the least equal. In Europe, the top 10% of income earners account for approximately 36% of total income, whereas in MENA, they command nearly 60%. Nevertheless, India stands out as the epicentre of extreme income inequality. Given the established link between rising inequality and slower economic growth, India must adopt proactive measures to bridge this gap.
Notably, the Nordic countries, including Denmark, Finland, Iceland, Norway, and Sweden, consistently rank among the most equal in the world by various criteria and often feature prominently in the list of the world’s happiest countries. Their success in achieving a high level of equality hinges on their commitment to social solidarity, progressive taxation, and substantial investments in education and healthcare.
Unlike many other nations, these countries offer free higher education to their citizens and boast innovative educational systems. India must similarly intensify spending on healthcare, education, and social safety nets to combat inequality. Taxing the wealthiest individuals more significantly presents another viable path forward.
The escalating income inequality within India’s borders demands immediate attention and action. By addressing this pressing issue, we can strive to create a more equitable and prosperous nation that upholds the principles of social justice and shared prosperity.
Across the globe, the most equal region is Europe and the least equal region is the Middle East and North Africa or MENA and they have dramatically different levels of inequality. In Europe, the top 10% of income earners account for roughly 36% of the total income, whereas in MENA it accounts for nearly 60%.
Even then, the world’s most extreme inequality has been observed in India. Since the rising inequality is linked to slower economic growth, India must take proactive steps in bridging the gap. Data is evident that the five Nordic countries viz Denmark, Finland, Iceland, Norway, and Sweden are among the most equal in the world on a variety of criteria and they often feature in the world’s happiest countries’ list too.
The key to high level of equality lies in focus on social solidarity, taxation and higher spending on education and healthcare. Unlike most other nations, these countries offer free higher education to their citizens and have a creative education system. India must also ramp up expenditure on healthcare, education, and social safety to reduce inequality.
Another way forward is simply taxing the wealthiest more.