Salaried Class And Demonetisation: The Elusive 'Promised Land' Of Lighter Tax Burden

The salaried classes of India have continued to bear a disproportionate and an unfair share of the direct taxes burden in India for a long time. This segment silently expected the burden of direct taxes to become more uniformly distributed after the demonetisation exercise of 2016.

The logic behind this expectation was fairly simple. With more transactions moving away from cash to the digital variants, it was believed that it would become more difficult for a host of wealthy non-corporate entities like those running big shops, and hotels among others to avoid paying their fair share of direct taxes.

This article will present a basic and common sensical analysis based on the direct tax collection data released by the tax authorities to show how the burden on the salaried class has only increased with time.

All the data made available by the tax authorities stops at FY2018-19; so, one can ignore any impact of the Covid-19 pandemic on this analysis.

Personal Tax Vs Corporate tax

Direct taxes can be divided into two broad categories — Personal income taxes and corporate taxes — which put together account for almost all of the direct tax revenues.

Personal income taxes are mostly paid by individuals on their incomes or profits, whereas corporate taxes are paid by companies incorporated under applicable statutes.

One can easily discern from the below plot that even though there is no major skew towards either of the components, the share of personal income taxes has been on the ascent since FY2014.

One can expect the relative share of personal income taxes to increase further in the coming years due to the corporate tax cuts announced by the government to boost investments.

This trend by itself wouldn’t be a cause for worry, provided the burden of personal income tax was shared more uniformly and fairly across the population. But, as we will see in the next section, the reality is quite the opposite.

Salaried Class and Their Tax Burden

Tax liabilities of the salaried classes are accurately and swiftly realised by the tax authorities in the form on Tax Deducted at Source (TDS). Their employers are liable to report their salary incomes and deduct taxes beforehand. However, various business operations like shops, hotels, proprietorships, and firms are expected to report their earnings/profits accurately and pay their fair share of direct taxes.

However, as this section will show, government enforcement is severely lacking when comes to realising direct taxes from the non-salaried segment.

In the year 2018-19, only 16,62,771 cases of non-corporate entities (individuals, firms, associations et cetera) reported incomes higher than 20 lakh rupees. This necessarily includes the relevant salaried persons from government and private sector — which immediately points to the fact there is huge underreporting of income by the non-salaried segments.

With demonetisation, there was a hope that non-salary incomes would get reported fairly for the realisation of direct taxes. However, that’s not the reality.

For each year financial year, Income Tax authorities report the following statistics:

1. Total Income reported from Salaries (Individuals)- A

2. Total Income reported from Individuals- B

3. Total Tax liability from non-corporate entities:

(i) Individuals- C

(ii) HUF- D

(iii) Firms- E

(iv) AOP/BOI- F

Relative tax burden on salaries was computed using:

A/B X C/(C+D+E+F)

Since the tax authorities do not directly mention the taxes realised from salaries, I believe the above metric can provide a quick and reliable measure of:

1. Relative direct tax burden on the salaried class.

2. Trend in the above burden to evaluate the impact of policies etc.

As one can clearly see from the above plot, there is a clear trend of consistent increase in the share of taxes realised from salaries and demonetisation hasn’t helped reverse this trend.

While I agree that this quick work is far from a definitive analysis on the tax burden on various segments of the Indian population, we can definitely agree on the following:

One, economists, politicians and tax authorities believe that realising a greater share of direct taxes is a net positive outcome because of targeting.

Two, share of personal income taxes has been increasing for the last decade and is expected to further increase with the corporate tax cuts announced by the government.

Three, share of taxes realised from salaries has been increasing consistently for as long as one can see.

All this clearly means that the burden on the salaried classes of this country needs easing and quickly so. This doesn’t mean a small tweak in the lower threshold of the bottommost tax slab to cover for inflation, but a substantial downward revision of tax rates and a major rejig on all the slabs.

It is time for the government to stop squeezing this segment out of juice and invest its resources in exploiting the data and analytics coming from UPI and digital transactions to ensure non-salary direct taxes are realised fairly.