“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.