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Why did only 1.6% of Indians pay income tax in FY 2022-2023?

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In India, only 1.6% of people paid income tax in FY 2022-2023 and contributed 27% of total Indian tax collection. In FY 2022-2023, 7.4 crore people filed Income tax returns but only 2.24 crore people paid the income tax. According to a report in the FY 2022-2023 70% of people claimed zero liability. 

As per Loksabha’s response in the FY year of 2019-2020 6.48 crore people filed Income tax returns which increased to 7.4 crore in the FY year of 2022-2023. On the other hand people in the domain of zero tax liability were 2.9 crores in the FY year 2019-2020 and Increased by 5.16 crore in the year 2022-2023. 

Every year more people file income tax returns but very less pay the tax. Data shows that In India very tiny portion of the population pays taxes. This data raises the question of why a very tiny population in India pays income tax. Following are some concerning reasons why Indians are not paying tax.

Thinking of tax as a burden

Most Indians think of tax as a burden. People in India think they are not getting enough service and facility which they should get from the government. When people do not get good infrastructure and services from the government they eventually lose their faith in the government. That is the key reason why tax is considered a burden in India.

Misuse of the Hindu Undivided Family Act

Most Indians use HUF(Hindu undivided family) as a tax evasion tactic. A Hindu undivided family(HUF)  is considered a ‘person’ under section 2(31) of the Income Tax Act of 1961. 

Hindu undivided family consists of all persons lineally descended from a common ancestor and includes their wife and unmarried daughters. HUF may be composed of a Large family, a small family, and a nuclear family as well. 

Members who come under the HUF do not have to pay taxes individually. Because of Income tax law, HUF is considered an Independent person(Separate legal entity). Most Indians use HUF as a tax-saving tactic. 

High-income tax in comparison to average income:

India’s income tax slab is three times of per capita GDP. In India, the tax slab starts at ₹5 lakh which is 3 times of per capita GDP. The income tax threshold is much lower in countries like Indonesia, Mexico, Philippines i.e. 1.1,0.9,0.4 of per capita GDP respectively. This means only a small % of Indians earn enough to pay the income tax. That is the core reason of Why did only 1.6% of Indians paid income tax in FY 2022-2023.

Informal sector of the economy: 

A large population of India works in the informal sector of the economy. More than half of the Indian population works in agriculture which is an informal sector of the economy. The informal sector of the economy does not pay any taxes they are exempt from the taxes. Many others work in cash-based informal jobs, which are again exempted from the tax. The informal sector does not contribute to tax paying. 

Complex tax system: 

The tax system is very complex in India in comparison to other countries. There are no legal ways of tax saving for Middle-class taxpayers. On the other hand rich can use political connections and agricultural land for tax evasion very easily. A complex tax system is one of the major reasons behind tax evasion.

The course of action: 

Taxes are the backbone of any government and country. Taxes are a significant source of revenue for the government. Taxes are the driving force behind infrastructure, education, and healthcare. If people do tax evasion then are also evading infrastructure, healthcare, and education from the country. Tax revenue also supports various government schemes which are made to target the marginalized and poor people. Only by understanding the importance of tax, we can stop tax evasion.

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