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  1. Egalitarian middle & upper classes? No, India should focus on growth first

Egalitarian middle & upper classes? No, India should focus on growth first

One of the most important thinkers, in recent times, to write about the problems of inequalities in modern societies is Thomas Piketty...

By: and | Updated: June 8, 2016 8:44 AM
Although the statistical universe comprising the total population of individual assessees is small—hardly 2.38% of the total population of our country—the classes it comprises are articulate, well-organised and influential. (Reuters)

Although the statistical universe comprising the total population of individual assessees is small—hardly 2.38% of the total population of our country—the classes it comprises are articulate, well-organised and influential. (Reuters)

One of the most important thinkers, in recent times, to write about the problems of inequalities in modern societies is Thomas Piketty—the internationally acclaimed French economist. “Inequality is not necessarily bad in itself,” he writes in his authoritative work, “the key question is to decide whether it is justified.”

A database, recently published by the income tax department after a lapse of nearly 15 years, contains valuable information on this important subject—on how, in fact, four classes of individual taxpayers shared the income declared by them in their returns for FY12.

Although the statistical universe comprising the total population of individual assessees is small—hardly 2.38% of the total population of our country—the classes it comprises are articulate, well-organised and influential. Accurate statistical information of different strata of this population deserves serious consideration because it provides some idea of inequalities in our society—nearly 70 years after Independence and a generation after the introduction of economic reforms.

One important fact we gather from the database is that, although the number of assessees in all categories on the records of the income tax department during FY12 was 4.73 crore, only 3.12 crore actually filed returns. And of these, only 1.38 crore declared any tax liability. This analysis, however, limits itself to 2.88 crore individuals who filed returns this year. Again, of these, 56.48% declared no liability to pay tax; only 1.25 crore individuals, 43.52% of the statistical universe or 1.03% of the total population of this country, actually paid any tax. There were some taxpayers who had tax deducted at source from their incomes, but did not file any returns. Since no information is readily available in the public domain on this category of persons, they have been kept out of the analysis.

During the year, these 2.88 crore taxpayers declared income of R10.83 lakh crore. This accounted for 12.02% of the GDP of that year. The accompanying table sums up how they shared the declared income.

The rich included three persons with income above R500 crore; 35 above R100 crore; and 54 above R50 crore.

It is immediately apparent that the number of taxpayers in most categories is depressingly low. This could be the result of both massive under-reporting of incomes at every level and a large segment of society opting out of the tax net. Significantly, however, a rich person—among the top 1% of the taxpayers—appears to have received about 34 times the income of a person of an aspirer. A person in the upper middle class who would have formed part of the top 5% of the taxpayers received 6.56 times the income of such an aspirer.

Overall, however, although the issue of inequality of income in our society could be emerging, the income distribution does not yet appear to be particularly skewed towards extreme inequality—a number of studies have shown that inequalities in Indian society are not as pronounced as in the US, China or Brazil. Even so, the heavy concentration of income at the top-of-the-pyramid is bound to appal many people who put high value on equity in income distribution.

Why do these disparities exist? They could be partly traced back to inheritance and partly to diversity in talents and varying level of abilities of people. An able, hard-working person may well earn more than a person who lacks these qualities. At the end of the day, the question is, how much society values a particular talent or ability? In a market economy, forces of demand and supply determine wages and thus rock-stars and sportsmen may be super-rich as compared to the rest of us; but luck also plays an important part in life.

Some economists in advanced capitalist societies who are offended by large inequalities have advocated an inheritance tax or estate duty. From a purely practical point of view, in the Indian context, any attempt at redistribution of the income of the rich, through an inheritance tax or steeper income-tax rates on them, would hardly serve any useful purpose. This is because our tax base of individual taxpayers is limited to just 1.03% of the population. Thus, 99% of the population would remain unaffected by redistribution of income attempted through the tax system. In addition, it would adversely affect savings, discourage hard work and lead to greater tax evasion. This would, in the end, only hurt development, and we would just end up distributing poverty.

The government’s current anti-poverty policies relating to direct transfer of benefits to the poor through their bank accounts, without involving the tax system, on the other hand, affect a much larger segment of society. These policies will possibly be much more effective in creating a more just society.

Economic theory appears to suggest that we need not obsess too much over questions of equity at the current stage of our development. Empirical evidence indicates that, as societies develop, inequalities initially tend to increase and then gradually taper. Perhaps, at present, the primary focus of the government should be on accelerating the rate of economic growth. The rising tide of development, John Kennedy pointed out, lifts all boats. More importantly, we need to create mechanisms that ensure equality of opportunity and upward social mobility in our society. But we should continue to monitor inequalities in income so that they do not grow beyond a point and generate social unrest.

Piketty sums it up best: “You need some inequality to grow … but extreme inequality is not only useless but can be harmful to growth because it reduces mobility and can lead to political capture of our democratic institutions.”

Singh is former chief commissioner of income tax and ombudsman to the income tax department, Mumbai.

Khanna is former senior
partner, AF Ferguson,
Chartered Accountants

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