Share of personal income tax and indirect tax shows increase

Over the last week, during the election campaign, the Congress’ manifesto and the party’s emphasis on social justice and welfare were suddenly thrust into the limelight. Prime Minister Narendra Modi sought to give the Congress’ demand for a caste census and its plans to study distribution of surplus government land to the poor, among others, a communal turn. The Congress defended its manifesto saying the rising wealth inequality in the country needs to be addressed and dismissed Mr. Modi’s claims that its plans intended to favour a particular religious group. In the midst of this political controversy, the chairman of the Indian Overseas Congress, Sam Pitroda, floated the idea of an inheritance tax, which is not in place in India and is also not mentioned in the Congress’ manifesto.

Almost concurrently, as this political debate was playing out, the Finance Ministry released provisional data that showed an uptick in net tax collections. This is mostly driven by an increase in personal income tax and securities transaction tax collections. On the other hand, collections from net corporate taxes have reduced marginally. The data also show that revenues from personal income tax and securities transaction tax grew at almost double the pace compared to revenues from corporate taxes last year.

We look at some numbers to provide context to the ongoing debate and the recent release of tax data.

Chart 1 | the chart shows corporate tax and personal income tax as a share of gross tax revenue, as of February every year.

Chart appears incomplete? Click to remove AMP mode

As can be seen from the chart, the share of corporate tax has been on a decreasing trend, while that of personal income tax has been increasing. As of February 2024, the gap between the two tax shares further increased, with income tax forming 28% of the gross tax — a new peak. The sharp fall in corporate tax after FY19 can be attributed to the deep corporate tax cuts introduced by the Bharatiya Janata Party-led government in September 2019.

The data also show that the share of direct taxes has been decreasing, while that of indirect taxes has been increasing. Direct taxes, which include taxes levied directly on the incomes of corporations and individuals, are said to be “progressive” because those who earn less are taxed less and vice-versa. On the other hand, indirect taxes, which include union excise duties and the Goods and Services Tax are considered “regressive” as all consumers, regardless of their income levels, pay the same amount.

Chart 2 | The chart shows the share of direct and indirect taxes in the combined tax revenue receipts of the Centre and the States across years.

As can be seen from the chart, the share of indirect taxes, which had been falling steadily since the 1980s, has increased in the past decade. On the other hand, the share of direct taxes, which had been increasing, has consistently recorded a downturn in recent years.

Chart 3 | The chart shows the annual income bracket-wise share in total income tax returns filed (blue) and the share in total amount of income tax paid (red). Figures in %

Importantly, Chart 3 shows that a bulk of those who file personal income tax earn an annual income of ₹1 lakh-₹5 lakh. Richer individuals who earn more than ₹50 lakh are few and far between.

Moreover, a comparison with BRICS economies, for which data are available, shows that the effective personal income tax rate in India is among the highest (Chart 4).

Chart 4 | The chart compares the effective personal income tax rate in India with other BRICS countries which had data. 

Note: In case a country had two tax regimes, the highest effective tax rate was considered for comparison

Put together, the data show that poorer citizens and those in the middle-class category are increasingly shouldering a higher share of the tax burden. This is due to the combination of the rising share of personal income tax and indirect taxes in total revenue.

Rachita Rabboni is interning with The Hindu Data Team

Source: Centre for Monitoring Indian Economy, Controller General of Accounts, PricewaterhouseCoopers (PWC)

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Union Finance Minister Nirmala Sitharaman. File
| Photo Credit: PTI

The government’s decision to slash corporate tax rates in late 2019 was a well-considered move to attract investments that has made a lot of difference, and a major transition is under way in the industry-labour relationship, Union Finance and Corporate Affairs Minister Nirmala Sitharaman said on Friday.

She was replying to a query on the efficacy of corporate tax cuts and the production-linked incentive schemes, some of which may be fuelling capital-intensive investments that create fewer jobs, during an interaction with students after delivering the Pandit Hriday Nath Kunzru Memorial Lecture 2024 at her alma mater, the Jawaharlal Nehru University (JNU).

Also read: The Hindu Explains | What corporate tax cut means for the Indian economy

Noting that India had a very high level of taxation for companies, the Minister said tax rates were cut with a view to bring in more investments, which in turn would create jobs and trigger a “virtuous cycle” in the economy. Many countries were “contemplating” such tax structure changes to attract investments at the time, she said, stressing that greenfield as well as brownfield investments are now happening.

“Even now, I think that is the way to go forward and ensure additional capacities are coming in areas that are going to be job-creators. If there is a perception that it may not have resulted in as many jobs as was in the olden days of investments, it is also because… even as we took this decision, we were aware the industrial revolution called 4.0 was setting in, Web 3.0 was coming in, which is now talked about as AI and GPT,” she said.

‘Upskilling must’

“The matter of fact is that industry, particularly in manufacturing, is going through a huge transition, a reset. And when resets happen, the labour force is also catching up with skills that are required to meet with that reset. So there will be requirement of labour… that is why the government has ramped up skilling and upskilling [for] people to get into industry,” the Minister said.

The industry, she said, wants labour to be at a different level now, as it has introduced robotics, and digitised the operations. “So, the long and short of it, there is a transition and reset happening between industry and labour. If we are looking at only the old-fashioned [sectors] like cement and iron and steel…. no, there are newer industries coming and newer workforce is coming out, they are being trained and they are being put in,” Ms. Sitharaman said.