Why Only a Small Percentage of People Pay Income Tax in India

A small percentage of the population in India pays income tax. There are several reasons for this, including:

• Large Informal Sector: India has a large informal sector, which consists of businesses and workers that are not registered with the government. This means that their income is not taxed.
• High Income Tax Threshold: The income tax threshold in India is relatively high. This means that people who earn below a certain amount of money do not have to pay income tax.
• Complex Tax Laws: The tax laws in India can be complex and difficult to understand. This can discourage people from filing tax returns.
• Inefficient Tax Administration: The tax administration in India is inefficient. This means that it is difficult for the government to collect taxes from all those who owe them.
• Widespread Tax Evasion: Tax evasion is a significant problem in India. This means that people who are supposed to pay income tax do not.

Let’s take a closer look at each of these factors:

• Large Informal Sector: The informal sector is a major part of the Indian economy. It is estimated that around 80% of workers in India are employed in the informal sector. These workers typically earn low wages and do not have many benefits. The informal sector is not well-regulated, and it can be difficult for the government to track income and collect taxes from informal businesses.
• High Income Tax Threshold: The income tax threshold in India is relatively high. In 2023, for example, the threshold for individual taxpayers under the age of 60 was ₹2.5 lakhs (US$3,125). This means that people who earn less than this amount do not have to pay income tax. This can be a disincentive for people to declare their full income, especially if they are working in the informal sector.
• Complex Tax Laws: The tax laws in India can be complex and difficult to understand. This can be a major barrier for people who are trying to file their tax returns. The tax code is often changed, and it can be difficult for taxpayers to keep up with the latest changes.
• Inefficient Tax Administration: The tax administration in India is inefficient. This means that it is difficult for the government to collect taxes from all those who owe them. The tax department is understaffed and overworked, and it can be slow to process tax returns. There are also corruption problems within the tax administration.
• Widespread Tax Evasion: Tax evasion is a significant problem in India. It is estimated that a large percentage of people who owe income tax do not pay it. There are a number of reasons for this, including the complexity of the tax code, the inefficiency of the tax administration, and a general lack of trust in the government.

What can be done to increase the number of people who pay income tax in India?

Several things can be done to increase the number of people who pay income tax in India. These include:

• Reducing the informal sector: The government can take steps to reduce the size of the informal sector. This could involve making it easier for businesses to register with the government and providing incentives for businesses to formalize their operations.
• Lowering the income tax threshold: The government could lower the income tax threshold. This would mean that more people would be required to pay income tax. However, it is important to balance this with the need to ensure that the tax system is fair and progressive.
• Simplifying the tax code: The government could simplify the tax code. This would make it easier for people to understand their tax obligations and to file their tax returns.
• Improving tax administration: The government could improve tax administration. This could involve increasing staffing levels at the tax department, investing in technology, and tackling corruption.
• Public awareness campaigns: The government could launch public awareness campaigns to educate people about the importance of paying taxes. These campaigns could explain how taxes are used to fund public services and how tax evasion harms the economy.

Conclusion

India has a significant problem with tax evasion. This is due to several factors, including the large size of the informal sector, the high-income tax threshold, the complexity of the tax code, the inefficiency of the tax administration, and widespread tax evasion. Several things can be done to increase the number of people who pay income tax in India. These include reducing the size of the informal sector, lowering the income tax threshold, simplifying the tax code, improving tax administration, and launching public awareness campaigns.