Rising Role of Personal Income Tax in India
In recent years, personal income tax (PIT) has emerged as a significant contributor to India’s overall tax collections. This trend has positively impacted the country’s tax-to-GDP ratio. While corporate income tax (CIT) collections have also increased, they have not kept pace with the rapid growth of PIT. As India continues to evolve economically, understanding these tax dynamics is crucial for policymakers and taxpayers alike.
The Shift in Tax Contributions
India’s tax-to-GDP ratio for the fiscal year 2024 stands at 11.7% for the central government and nearly 18.5% when combining state and central figures. This marks an improvement from the 17.7% ratio recorded in FY22. Such growth in tax ratios positions India favorably compared to other Asian economies. The trend reflects a broader global pattern where personal income taxes play a vital role in government revenue.
In many OECD countries, personal income tax is a primary revenue source. For instance, in 2022, the PIT accounted for 44% of total tax collections in the United States and 55.8% in Denmark. In India, the share of PIT in the central government’s gross tax collections has steadily increased from 21.3% in FY2017-18 to over 29% in FY24. Preliminary data for the current fiscal year indicates that PIT now contributes 31% of the central government’s gross tax revenue. In contrast, the share of CIT has decreased from 29.8% in FY18 to 26.3% in FY24, highlighting a significant shift in the tax landscape.
Growth in Taxpayer Base
Government data reveals that India had approximately 10.4 crore taxpayers in FY23, with 10.3 crore being non-corporate taxpayers. This represents a 23.3% increase since FY18, when there were only 8.5 crore taxpayers. The rise in the number of taxpayers can be attributed to several factors, including economic growth, rising incomes, and the government’s efforts to expand the tax base. Initiatives aimed at reducing tax evasion and improving compliance have also contributed to higher PIT collections.
Additionally, the buoyant capital markets have led to increased capital gains tax collections. The taxation of dividends at the individual level, rather than at the corporate level, has further bolstered PIT revenues. These developments indicate a robust tax environment that is responsive to economic changes and government policies.
Global Tax Trends and Their Impact
Post-COVID-19, governments worldwide are shifting their focus from corporate tax rate cuts to broadening the tax base across various tax types. The average corporate tax rate among OECD countries has remained stable, moving from 21.7% in 2019 to 21.1% in 2024. In India, the effective corporate tax rate of 25% (without incentives) has improved the country’s tax competitiveness. This moderate rate encourages private investment and job creation.
The Indian government’s recent budgets have emphasized stability in tax rates, simplification of tax laws, and efficient administration. These measures aim to widen the tax base and enhance revenue generation. However, the declining growth in CIT revenues raises concerns. Policymakers may need to reconsider the concessional tax regime for new domestic manufacturing companies to stimulate long-term growth, especially in the current geopolitical climate.
The Future of Personal Income Tax in India
The peak personal income tax burden in India, including surcharges and cesses, reaches 42.7%. While this is competitive compared to countries like China and Denmark, there is a strong case for not increasing the tax burden further. Doing so could hinder consumption and lead to the migration of high-net-worth individuals (HNWIs) seeking more favorable tax environments.
Moreover, low- and middle-income taxpayers deserve more relief, especially given the buoyant PIT collections despite India’s relatively low per capita income. Linking tax slabs to inflation could help maintain the real income of taxpayers, preventing inflation from eroding their purchasing power.
As the upcoming budget approaches, there are high expectations for measures that will benefit smaller taxpayers. With a personal income tax buoyancy of 1.7, the government has the potential to provide meaningful relief, ensuring that the tax system remains equitable and supportive of economic growth.
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