Context:
Despite long-held assumptions that personal income tax (PIT) in India is progressive meaning the rich pay proportionally more a new research paper by Professor Ram Singh, Director of the Delhi School of Economics, presents compelling evidence that PIT may actually function in a regressive manner for the ultra-wealthy.
Personal Income Tax (PIT) is a levy imposed by the government on an individual’s earnings. It encompasses income from sources like wages, bonuses, interest, and dividends. Tax rates and brackets differ among countries. Typically, individuals with higher incomes are subject to higher tax percentages.
Key Findings from the Paper
Title: Do the Wealthy Underreport Their Income? Using General Election Filings to Study the Income–Wealth Relationship in India
Data Sources: Central Board of Direct Taxes (CBDT), election affidavits of political candidates, Forbes India’s Top 100 Wealthiest List
Severe Underreporting Among the Wealthy
- Top 0.1% of Indian households report income that is only 8% of the national average income-to-wealth ratio
- For Forbes-listed families, reported income is just 1/12th of what a regular household would declare if they held similar wealth
- This creates a class of “income-poor, asset-rich” taxpayers who significantly reduce their tax burden
Effective Tax Rates Fall with Rising Wealth
- The top 0.1% of households pay only 10% of their capital income in PIT (including capital gains and dividend taxes)
- Forbes-listed billionaires pay merely 5% of their capital income as tax
- This means India’s richest individuals pay a lower effective tax rate than many middle-class taxpayers
Implications: PIT System Becomes Regressive
- Wealthier citizens minimize reported income, reducing their tax liabilities
- The PIT system becomes less redistributive, exacerbating income inequality
- It undermines the progressivity of India’s tax regime
Structural Loopholes Exploited
- Underreporting income is facilitated through:
- Unrealized capital gains
- Complex corporate and trust structures
- Offshore assets
- Assets not reflected in annual income declarations
Policy Implications and Recommendations
- Strengthen asset-based taxation, such as:
- Wealth tax or estate duties
- Improved capital gains tracking
- Integrate wealth data from public filings, business ownership records, and financial disclosures
- Use AI and analytics for better profiling and enforcement on high-net-worth individuals
BS
