Progressive taxation: Too few people paying income tax is a structural problem; what can be done to broaden the tax base? Mitali Nikore responds

Mitali NikoreFounder and economist, Nikore Associates, sThe large number of tax-free voters in India is a structural problem. We need to look at corporate taxes and taxes on small businesses and startups, because startups get a lot of exemptions and some support that they should get, just like SMEs. But we also need to start thinking about increasing corporate taxes.Has the Indian economy expanded its tax base to keep pace with our GDP growth?
Mitali Nikore: At this point, we have to question the measures regarding the progressivity of our taxation. At the end of the day, when we look at the growing inequality in the Indian economy, we realize that the incomes of the top 1 decile, the top 5 decile and the top 10 decile are growing much faster than the incomes of the bottom 50% or even 70%.

So when they talk about the tax base, we need to get the tax base for IT to the 30th percentile. We’re not there yet. We’re still in the 10th percentile when it comes to taxation. Only the top 10% of earners in this country pay any taxes. So, number one, we need to have progressive taxation.

But what about revenue? What is the revenue from the lowest taxpayers as compared to the cost of collection? In some cases, in the annual income bracket of Rs 3 lakh to Rs 7 lakh, the cost of collection of tax from that bracket is very high with marginal return. The amount of average tax that every taxpayer pays is quite low. So, if you do away with this tax and start taxing only after Rs 7 lakh or even Rs 10 lakh, the revenue will still be quite high and the cost of collection quite low. Also, you will increase the money in hand for consumption of that person who earns less than Rs 10 lakh per annum and thus increase your indirect tax revenue.

As an economist, I would say that the best way to increase progressivity and to make our tax collections more widespread is through GST, not just through personal income tax. There are large groups around taxation whose rate can be increased and who are currently exempt from taxation. Like the rich farmers. Why do we have this category that is exempt from taxation? Perhaps a study is needed to see if there is an opportunity for taxation and also to look at corporate taxation in a different way to expand that pool.

If you compare the percentage of voters in developed countries who pay taxes with those in India, the difference is quite stark. In the US, more than 50% of voters pay taxes. In Germany and the UK, around 60% pay taxes and in France, more than 78%. In India, less than 3% of voters pay taxes. To what extent do you think GST has helped to widen the net and are we heading in the right direction, at least on the GST front?
Mitali Nikore: When we look at the reasons behind this and consider why such a large section of voters in India do not pay taxes, it is also a structural issue.

A large number of people in our labour markets, around 70% of women and almost 50% of men, identify themselves as self-employed as per the latest data from the Periodic Labour Market Participation Survey. Of course, being self-employed does not mean that they are entrepreneurs. It can also mean that they are solopreneurs or they are working in the gig economy and again, as per the Economic Survey, there are almost 1.3 crore gig economy workers in the economy. All these categories in many cases are not subject to personal income tax because they do not meet the threshold. They still earn less than Rs 3 lakh per annum and sometimes less than Rs 7 lakh and only a small amount comes in. They have to pay only 5% and out of that they also get some exemptions. So a large part of our labour market being self-employed leads to a situation where they do not have to pay tax, that is the first reason.

Secondly, GST is the only tool through which we can widen the tax net when we are not able to collect direct taxes. But honestly, at this point of time, there is also a need to look at corporate taxes and taxes on small businesses and startups because startups get a lot of exemptions and some support that they should get, as should SMEs. But we also need to start thinking about increasing corporate taxes.