Government’s Income Tax Math – Are the Rich Expected to Get Incredibly Richer?

Quite likely, if you look at the story behind the numbers, writes Aunindyo Chakravarty.

Is the government betting that the richest taxpayers are going to get immensely richer next year? Quite likely, if you look at the story behind the numbers.

(Image: Aroop Mishra/The Quint)

Is the government betting that the richest taxpayers are going to get immensely richer next year?

Quite likely, if you look at the story behind the numbers.

In 2022-23, 2.9 crore individuals and HUFs (Hindu Undivided Families) paid income tax. Out of these, about 1.25 crore declared a pre-tax gross income of more than Rs 10 lakh in their IT returns.

It is safe to say that these people would have crossed the Rs 12 lakh income threshold by the time the new income tax rates kick in.

So, only these 1.25 crore taxpayers will end up paying taxes in 2025-26.

In 2022-23, these people accounted for about 60 percent of the total taxes paid.

And they paid about 13 percent of their gross income as income tax. (If you think that is low, please remember that the richest people in India earn mostly from capital gains, which attracts lower taxes.)

Now this is where it gets interesting.

In 2022-23, these people paid Rs 5 lakh crore in income tax on a total gross income of Rs 38 lakh crore.¹

In 2025-26, the government hopes to collect over Rs 14 lakh crore from them.

Let us assume that some of them will cross into the Rs 50 lakh+ bracket and have to pay surcharges on the income tax they pay.

So, it is possible that the effective tax rate will rise to 15 percent of their gross income.

How much would they have to earn to pay that much income tax? — about Rs 95 lakh crore.

That means, their gross income has to rise at a rate of 36 percent per year, between 2022-23 and 2025-26.

That is more than 3.5 times the rate of growth of our nominal GDP. Is that possible? Let us do the math.

These 1.25 crore taxpayers are likely to be spread across 1 crore families, which puts them in the richest 3 percent of households in India.²

The gross income of such people has grown at roughly 8.5 percent per year³, between 2013-23, when nominal GDP grew at 10.5 percent.

If the government expects this to change suddenly, then it is expecting inequality to increase dramatically.

It is betting on the rich getting drastically richer.

Notes:

1. My calculation by extrapolating the share of income tax paid by the top 1.25 crore of taxpayers, according to the Income Tax Department’s data, to the actual Income Tax collections presented in the Union Budget.

2. If we assume that there is an average of 1.25 adults per family earning more than Rs 12 lakh per year. There are roughly 34 crore households in India, so 1 crore is 3 percent of that.

3. Based on estimates provided by the World Inequality Lab for the average pre-tax income growth of the richest 3 percent Indians.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This article was first published on the author's personal blog and has been republished with permission. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)