Direct Tax collection and inequality

“The government said last week that its collections of direct taxes between 1 April and 15 December this year was 42.5% higher than their level in the same period of 2006.”
I was reading an article in livemint about why the direct tax collection was rising?

Their answer was:

direct tax collections could be soaring because of better tax compliance or because the rich and companies are getting a growing share of national income. In other words, the cause could be either that fewer people and companies are evading taxes or that inequality is increasing.

I agree that lowering of tax rates and introduction of PAN card and TDS has increased the tax compliance. but rising inequality??????????

How did they come to this conclusion?

Now if the rich (say earning 1 cr p.a.) was getting rich… then
last year he paid almost 33% of his income in tax (33 lakh) and this year even if he earns 2cr, he will still continue to pay 33% of his income….
i.e. the direct tax collection would rise with the growth of the economy.

However Say there is a guy who earned 100,000/- last year.. he would have not paid any taxes.. but with the booming economy if he earns 150,000/- this year then he would pay a small tax…. which when compared over last year would lead to a significant percentage increase in taxes.

Indian economy is close to a Trillion Dollars and the per capita income of an Indian is about a thousand dollars (39,000 INR) While the income tax slab starts at 1,10,000/- INR i.e. 3 times the per capita income. The tax slab starts at 10% and then gradually increases to 33.4%
Now 8% p.a. of GDP growth rate would double the country’s per capita income in 9 years. Applying some bell curve theory (statistics) you won’t be surprised that the number of tax payers will simply boom. Hence the tax collection. So this increase in direct taxes is not a sign of rich paying a higher share if their income in taxes, but the middle income group paying taxes for the first time. Hence a proof that the benefits of liberalization are finally reaching the masses.

This theory is confirmed when one looks at 2 data:
1) Gini Coefficient: the scientific statistical measure of inequality. You would find that the inequality in india has almost remained constant since the Mughal Period.
2) The number of people registered for PAN (direct taxes) is growing at a rate faster than the IT office can issue PAN cards.

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7 thoughts on “Direct Tax collection and inequality

  1. interestg analysis
    1. the it officers dont issue pan card ts the uti and nsdl that do nowadays
    2.i dont think pan has anything to do with payin taxes anymore people need pan as standard id proof

    the fact that the tax process in india is among the worst in the world and considers every taxpayer a thief evader and a robber is the crux of the problem

    people are still scared cause the tax dept is extremely corrupt and it has draconian sweeping discretionary powers that are mainly used to harass and extract bribes – nothing has changed since the sixties
    they can put fines of 300% tax plus substantial interest penalties
    but at the dept end they cant even get their house in order

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  2. //interestg analysis//
    thanks

    //i dont think pan has anything to do with payin taxes anymore people need pan as standard id proof//
    PAN has become a unique identity. now almost all the financial transactions are tagged with the PAN number and this is causing the increase in compliance.

    till a decade or 2 ago, there was no way to track the individual, what he spends and where he spends… and that makes evasion easier.

    //every taxpayer a thief evader and a robber is the crux of the problem//
    i guess the reasons r historic…
    in a land where the taxes were as high as 97% everybody had to evade taxes… it takes some time for this mentality to change.. but i am sure it will

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  3. well thats what most people think
    they dont really care they expect u to explain every single credit and debit with supporting documentation

    luckily salaried are seldom touched
    as i said before it is all about how to extract max out of the payer not in terms of tax but bribes

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  4. Actually, it is a fact that salaries in some sectors are growing tremendously, so perhaps this too is a factor. Also a huge number of people at lower levels get badly paid due to our labour laws. Companies hire say drivers on contract and pay zero benefits and pay little and sack at short notice because they don’t want to put the drivers on their roll. Anyway, this is just one example.

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  5. thats a sign of a booming economy 🙂 in todays job market a very new kind of skills and people who possess them are adequately rewarded as compared to the people in the sectors where the skills r in excess

    it takes a week to learn how to drive.. hence the car drivers don’t get adequately paid…. but if they r smart enough then they would drive a taxi or even better get training like Volvo training center for multi-axle vehicles or become a crane/machine operator.. those skills r in so much demand that industry has to pay a huge premium for it.

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