What latest tax data says about income inequality

The latest tax data on direct tax collections in seven years between FY15 and FY21, tabled by the Finance Ministry in Lok Sabha on February 13, 2023, gives insight into the way income inequality is playing out in India.

Two tax tables are of particular interest here. One is on individual tax payers in three tax slabs (taxable income) – ₹0-5 lakh, ₹5-10 lakh and over ₹10 lakh – and the other about corporation tax and non-corporation personal tax payers, without slabs.

Analysis of the first table shows the following five characteristics in growth of individual tax payers (from FY16 to FY21):

• Lowest income tax payers (₹0-5 lakh) grew, on average, at 4.7%. Of the six fiscals (FY16 to FY21), half or three fiscals saw decline in their numbers, in FY17 (-0.4%), FY20 (-7.1%) and FY21 (-11.2%). Their numbers fell by (-)1.6 lakh in FY17, progressively worsening to (-) 35.5 lakh in FY20 and (-) 51.7 lakh in FY21.

• Middle-income tax payers (₹5-10 lakh) grew, on average, at 18.1% with no negative growth fiscal.

• Highest income tax payers (over ₹10 lakh) grew, on average, at 24.5%. No negative growth here either.

• Pandemic fiscal of FY21 saw only individual tax payers in the lowest slab (₹0-5 lakh) declining, none else.

• Overall individual tax payers grew, on average, at 8.4%, with one negative growth in FY20 (-3.7%), reflecting pre-dominance of those in the lowest tax (income) break and also worsening economy before the pandemic hit.

The high impact on low-income individuals is not difficult to understand. The twin shocks of demonetisation (2016) and GST (2017) and untimely, unusually stringent and overnight lockdown of 2020 – all caused massive overnight loss of jobs and livelihoods, disproportionately hurting those at the base of the economic pyramid. The GDP growth fell from 8.3% in FY17 to 3.7% in the pre-pandemic FY20 and to -6.6% in the pandemic FY21.

The second table, on corporation tax and non-corporation personal tax payers (the latter includes individual tax payers mentioned above as well as proprietorships, LLPs and trusts and hence, larger in number), presents all direct tax payers.

This table shows, the growth averaged 4.8% for corporation tax payers and 8.14% for non-corporation personal tax payers. The latter witnessed a decline in FY20 (-3.44%) too, dragging down the overall growth in direct tax payers in FY20 to -3.35% – again reflecting dominance of non-corporation personal tax payers. The average growth in direct tax during FY16-FY21 was 8.08%.

To paraphrase, the impact of the twin shocks and lockdown was on the poor – clearly pointing to widening income inequality caused by both bad economic policies (demonetisation and GST) and the pandemic (lockdown).

But these data don't give a full picture.

Missing dollar millionaires and low corporate tax

Fully disaggregated data on individual tax payers – in 23 tax slabs from ₹'0' to ₹500 crore – is available until FY18 only (four fiscals ago). This FY18 data tells a different story.

Credit Suisse's Global Wealth Reports started listing India in the top 10 countries with high (USD) dollar millionaire (physical and financial wealth) presence from 2018. Its reports (2019, 2020, 2022) says Indian dollar millionaires numbered 7.25 lakh in 2018, 9.12 lakh in 2019, 6.89 lakh in 2020 and 7.96 lakh in 2021. In 2026, its 2022 report said, India could "more than double" to 1.6 million (16.32 lakh) dollar millionaires.

India scrapped wealth tax in 2016 on the plea that it was a tax "with high cost of collection and low yield". The only year for which the dollar millionaires can be checked for paying tax is FY18 – for which numbers for all 23 tax slabs is available. Assuming that the annual income of these dollar millionaires is 10% of their wealth, they should be declaring income of ₹70 lakh (at exchange rate of around ₹70 at the time). How many actually did so?

Since these 23 tax slabs don't mark ₹70 lakh (marks "more than" ₹50 lakh to ₹1 crore, and above), the closest to look is from "more than" ₹50 lakh. For FY18, this shows, they numbered 4.26 lakh – far less than 7.25 lakh dollar millionaires in 2018 and 9.12 lakh in 2019. This wide gap points to two possibilities – massive tax evasion and poor tax system.

A similar pattern is seen in corporation tax, which is on profit (rather than income as in the case of individual tax payers) in budget documents.

The latest budget documents show, in FY21 the "effective tax" on corporations making lowest profit (profit before tax or PBT) of ₹0-1 crore, is maximum, at 24.82%. But those who made more profits (PBT) progressively paid less "effective tax" with those declaring the highest PBT of more than ₹500 crore, paying the least, at 19.14%. This trend is very old and routinely mentioned in all budget documents.

What the above tax data reflect, and reinforce, is simple: Income inequality is a persistent phenomenon and structural and systemic in character. Chancel and Piketty (in their 2017 and 2019 book "Indian Income Inequality, 1992-2015: From British Raj to Billionaire Raj" have shown that income inequality was declining in India during the Nehruvian socialist era beginning with 1950-51, but the trend reversed post-reforms (mid-1980s) and post-liberalisation (1991) era, and accelerated further in the new millennium. More recently, World Inequality Report (WIR) of 2022 brought the focus back on both income and wealth (1995 onwards) inequalities.

Sweeping inequality under the carpet

The WIR of 2022 prominently figured in the Parliament in 2023.

Few would know that India still has a Ministry of Planning, headed by MoS (Independent Charge) Rao Inderjit Singh, despite the dismantling of Planning Commission of India in 2014 and rejection of its planned model of growth and development. Like the Ministry of Finance, the Ministry of Planning too is dismissive of inequality.

When asked about the WIR of 2022, the Ministry of Planning told the Rajya Sabha on February 13, 2023: (a) "The findings of the World Inequality Report, 2022 have not been accepted by the Government of India since they are based on questionable methodology. Therefore, statement based on the aforementioned report cannot be commented upon." and (b) "India's GDP per capita went up from ₹89,796 in 2013-14 to ₹1,72,913 in 2021-22, according to RBI. The government has taken actions to promote financial inclusion, entrepreneurship, job creation, as well as to enhance access to education and healthcare, in order to reduce poverty and inequality and to realise the objective of "Viksit Bharat"."

On the face of it, the growth in per capita GDP (GDP divided by population) may sound impressive – 92.6% up from FY14 to FY22 (which is at current prices) – but it should be put in perspective.

• Per capita GDP is combined incomes of households, central and state governments, corporations and non-corporate tax payers and therefore, gives inflated picture when it comes to household incomes and is inappropriate for measuring income inequality.

• GDP size (also at current prices) went up from ₹112.3 lakh crore in FY14 to ₹236.6 lakh crore in FY22 – a growth of 110.7% during the same period. Thus, the GDP growth was higher than that of per capita growth. This means, income of individuals is lagging behind the income of economy or GDP (which includes incomes of governments, corporations and non-corporations). In fact, this lag is a clear indication that the economic growth (GDP growth) is not benefitting all equally – some are benefitting more and some less. In other words, this reflects widening of income inequality.

On the very February 13, 2023, the Finance Ministry also dismissed another question on inequality by saying: (i) last household consumption expenditure survey data (better measure of income inequality) pertains to 2011-12 (which is a decade old data) (ii) next round of this survey was initiated in August 2022 (not complete or revealed yet) and (iii) Gini coefficient, which measures inequality (income and wealth), remains "almost same (as) in 2004-05" for rural areas and "increased marginally" in urban areas (from the decade old data).

But why the consumption expenditure survey of 2017-18 was junked is not mentioned. This survey had shown 'real' consumption expenditure had fallen in more than 40 years, reflecting growing poverty, which was unacceptable to the government. As for Gini coefficient, the government may not have recent data, but the Credit Suisse report of 2022 tracks wealth inequality in India and shows this has jumped from 74.6 in 2000 to 82.3 in 2021 (on 0-100 scale in which 0 represents perfect equality and 100 perfect inequality).

Budget's silence on inequality

The recent budget doesn't talk of inequality.

It promises relief to personal tax payers but perpetuates inequality by (i) keeping peak basic tax rate for individuals at 30% (for over ₹15 lakh income) – far higher than that for corporations at 22% and (ii) reducing maximum surcharge on high net-worth individuals (HNIs) from 37% to 25%. Inequality is also inherent to (iii) capex push for capital-intensive railways and roads while cutting down social spending (including on health, education, social safety, job scheme MGNREGS) to 18% of the total expenditure – falling below 20% for the first time since 2009.

The budget speech came exactly 37 days after the government announced "free" ration, in place of "subsidized" ration, for 62.5% households or 813 million Indians from January 1, 2023.