A Study on Compliance of Tax Structures in Income Inequality and the Reforms Required

11th January, 2021 - 12:42 pm Categories: TAX 0 Comments

Introduction

Poverty is extensively characterised as a vicious circle. This is to say that there are various forces placed in a constellation (proverbial) that work together to keep a person poor or a group of people in the clutches of poverty. However, in mainstream politics, rarely is poverty discussed from the perspective of unjust redistribution of wealth.

Perhaps, it is this lack of conversation and the urge to please huge corporations to entice huge investments, the issue of poverty has stayed prevalent. The disparity in the percentage of wealth held by the super-rich and the poverty-stricken is alarming.

It is pertinent to note that, these inequalities are not merely coincidental but rather collateral damage of unchecked capitalism. Tax structures often offer tax incentives, corporate tax cuts, etc, to huge corporations in order to encourage foreign or in-country investments. However, these incentives result in benefitting the huge corporation but do not really create opportunities or benefit the rich.

Income Inequality and Wealth  Inequality

The measure of inequality in a country can be attributed to access to education, health, equality (of religion, gender, sexual orientation), opportunities. However, a factor that has a susceptibility of being overlooked but is just as important factor to determine inequality is the income and wealth gap.

It is important to bring forth those government initiatives and interventions play a huge role in decreasing these income and wealth gaps. However, it has been observed that post liberalisation of markets in the 1990s has aided the above-mentioned inequality. Lucas Chanel and Thomas Picketty in their study, Indian income inequality, 1922-2015: From British Raj to Billionaire Raj? extensively study these inequalities throughout various years. The study derived that,

“The top 1% income share is at its highest level (22%) since the creation of the Income Tax during the British Raj, in 1922. Top income shares and top income levels were sharply reduced in the 1950s to the 1970s at a time when strong market regulations and high fiscal progressivity were implemented. During this period, the bottom 50% and the middle 40% of incomes grew faster than average. The trend reversed in the mid-1980s with the development of pro-business policies.”^[1]

However, despite the pronounced persistence of inequality, India is often mistaken as a country with relatively low-income inequality. The low inequality claims are often attributed to low rates of Gini coefficient^[2]. The Gini coefficient data on equality is produced through the National Sample Survey Organisation. Official survey data indicate that the Gini coefficient rose from 31 percent in 1993-94 to around 34 percent in 2011-12^[3]. Nevertheless, the data may understate the dispersion by excluding the very rich and very poor. Moreover, the data dates back to the year 2011-12, hence runs the risk of not being up to date with present disparities.

The prevalence of inequality becomes even more pronounced when other reports are considered as well. A report by Oxfam, titled, Commitment to Reduce Inequality Index, ranked India at 147th position out of 157th countries in terms of inequality. The stark inequalities can also be pointed by the unequal wealth distribution.

The report highlights that 77% of the total national wealth of India was proprietary to the top 10% of the population. In 2017, the richest 1% of the Indian population landed up with 73% of the wealth generated. This is starkly opposite to the 67 million Indians (the poorest half), who only saw 1% increase in their wealth.^[4]

The wealth inequality between the extremely affluent and the extremely poor is indicative of the prevalence of poverty in India. Varsha S Kulkarni and Raghav Gaiha, in their research titled, View: It’s time to scrutinise the link between poverty and income inequality, study this nexus using the Indian Human Development Survey data for 2005-12 (National Council of Applied Economic Research (NCAER) 2015. It revealed that despite growth, not everyone has shared in this growth, as 92% of India’s adult population has wealth below $10,000.^[5]

It is put forth that much of the wealth gains are due to property and stock market booms, which do not translate into greater employment opportunities.

Compliance of Tax Structure in Income Inequality

The statistics, as well as the studies discussed above in detail, point us towards two inclusions 1) there exists a huge wealth gap in the distribution of wealth and that the most affluent have a significant advantage at accruing a large share of it, 2) the aforesaid unequal dispersion of wealth lead to poverty and persistent income inequality.

However, before considering the tax-related aspects of income inequality, it is pertinent to examine other factors as well. These factors are -among others- education, discrimination, health, etc.

It is widely suggested that universal access to affordable healthcare and education are among the most effective affirmative action to assuage poverty. India performs poorly in both.^[6]

According to World Bank data released in 2016, there were 33% enrollment in private primary schools and 51% in private primary schools. Incidentally, the data point out that India lacks good government schools. This results in the taxpayer having to pay a large sum of money while also paying taxes.

A report by Times of India revealed that, in the year 2016, 64.6% of health expenditure by the Indian citizens by out of their own pockets. Further, WHO estimated in 2011 that more than 5 crore Indians were pushed below the international poverty line bearing to the health expenses.^[7]

These figures indicate that the taxpayers are essentially paying taxes to get universal health care and universal education; however, they are not being provided so.

It is pertinent to note that these issues which run the poorer population’s pocket’s dry don’t affect the affluent population. For instance, during the recent COVID- 19 times, while people have been forced out of jobs, shelters, and into poverty, the super-rich have managed to acquire even more wealth.

Forbes magazine recently revealed that in just a week between April 2 and April 9 the 10 billionaires gained $51.3 billion, while the global economy was severally suffering and millions were actively losing income and jobs.^[8]

It is important to now consider how the tax structure prevalent in India aids this unequal distribution of wealth.

a. Tax evasion and avoidance

It is commonplace for the affluent and huge corporations to avoid taxes. The huge corporations do it by the way of shell companies, profit shifting, and Tax havens. The Business Standard in 2019 reported that “Google, Facebook made Rs 10,000 crore; paid Rs 200 crore as tax in India”^[9], which amounts to a mere 2 % of its earnings.

A study by International Monetary Fund (IMF) revealed that “the non-OECD countries are losing 1.3% of their GDP or $200 billion of revenue every year because of profit-shifting (moving profit or revenue from the place of its generation to low or zero tax jurisdictions) and the OECD countries about 1% of GDP or close to $450 billion.”

Moreover, it is also important to note that there has been a sharp decline in the collection of income tax. The Wire, in 2019 reported that-“On closer observation, if we look at tax data over the last three years, the average income tax collected last year has seen a declining trend, even as the overall tax base has continued to widen from the government’s quest to formalise India’s economy. Last October 2018, e-filing of tax returns increased up to 70%, while the average income tax paid by individuals came down by 32% (to Rs 27,083).”^[10]

b. Major slashes in corporate taxes

Corporate tax cuts are revered by investors because they provide a “sugar rush” to the economy. Investors buy stocks which results in content stock traders and financial markets, however, it is only for a short term. But, they hardly create long term job opportunities.^[11]

c. The skewed tax incentive system

The revenue impact of tax incentives is to benefitting corporations more than individuals. Moreover; the effective tax rate is lower for larger companies than smaller companies. Larger companies avail higher deductions and incentives than smaller companies. This is made possible by the skewed tax incentive bars set. Companies with Rs. 10-50 crore of profit before tax (PBT) have a higher effective tax rate than companies with Rs. 500 crore PBT. Smaller companies pay more income tax than larger ones.^[12]

d. Corporate loan defaults are routinely written off with public money

Alarmingly, the RBI database indicates that every fiscal, corporate entities default their bank loans, which are consequently marked as NPAs and written off. The problem with this routine is that the central government remonetizes the banks using public money. The information was provided by the RBI in response to an RTI query on April 24, 2020. 

Tax Reforms to Initiate Redistribution of Wealth

The following studies drive us towards conclusions that the pronounced inequality that encompasses the population of India can only be achieved through the distribution of wealth. Following are a few ways in which the same can be achieved.

a. Wealth Tax

Wealth Tax is a direct tax on the total or market value of all assets levied on a person. Wealth Tax includes building, vehicle, land, etc. India had its own version of Wealth Tax named, the Wealth Tax Act, 1957. However, the act was abolished in 2016, pertaining to the lack of awareness and unfruitful gains.

However, what is required to bring back a more refined version of it to ensure the proper distribution of wealth. S. Subramaniam in his article,’ Doing the maths: Why India should introduce a Covid wealth tax on the ultra-rich’, points out that,

“A flat marginal tax rate of 4% imposed on the wealth of the members of the Rich List (which has a threshold of Rs 1,000 crore) should be an eminently reasonable levy. More detailed data available in the Hurun Report suggest that the threshold for the top ten is an astronomical Rs 71,500 crore.^”[13]

b. Inheritance Tax

It is a known fact that the heirs of the super-rich inherit huge wealth from their parents or grandparents. However, this cycle of inheritance leads to the unjustly acquired money stay in families. Therefore, it is imperative that an inheritance tax (a direct tax) be levied so as to ensure redistribution of wealth. India does not have any law which tackles tax upon inheritance, however, this needs to change and a law should be introduced.

c. Consumption Tax

Consumption tax is essentially a tax imposition on consumption, as opposed to income. Consumption-based taxation enables policymakers to easily gauge the income inequalities and levy taxes. Consumption taxes especially do well in developing countries for they are progressive.

Conclusion

The studies discussed above indicate a very prominent wealth gap and inequality nexus prevalent. However, the government seems reluctant to make policies that might actually uplift the poor from the clutches of poverty. This reluctance can be chalked up to the government’s courting of FDI, pro-government policies to encourage investment. However, what this foresight lacks is that these policies, investments, or tax incentives rarely do help in the generation of employment or substantial collection of taxes which might alleviate poverty. It is true that capitalism generates a lot of wealth; however, it distributes it in a very unjust way. Therefore, it is important that the government takes note of this and works towards making substantial changes.

Author: Shivani Kundle, a student of Bharati Vidyapeeth Deemed to be University, New Law College, Pune, intern at Khurana & Khurana, Advocates and IP Attorneys.  In case of any queries please contact/write back to us at aishani@khuranaandkhurana.com.

References:

^[1] Lucas Chanel and  Thomas Picketty, Indian income inequality, 1922-2015: From British Raj to Billionaire Raj?, 30 (Jul 2017),

https://wid.world/document/chancelpiketty2017widworld/

^[2] The Gini co-efficient, also known as Gini-index, is the statistical display of the distribution which is intended to show the income inequality/wealth inequality within a nation or a group of people in the nations.

^[3] CP Chandrasekhar Jayati Ghosh, The wealthy barely pay taxes — will the govt make them pay?, The Hindu BuisnessLine, (Nov 5, 2018),

https://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/the-wealthy-barely-pay-taxes-will-the-govt-make-them-pay/article25429311.ece#

^[4] India: extreme inequality in numbers, Oxfam,

https://www.oxfam.org/en/india-extreme-inequality-numbers

^[5] Varsha S Kulkarni and Raghav Gaiha,View: It’s time to scrutinise the link between poverty and income inequality , Economics Times, (Jan 20, 2020),

https://economictimes.indiatimes.com/news/economy/indicators/view-its-time-to-scrutinise-the-link-between-poverty-and-income-inequality/articleshow/73449712.cms?from=mdr

^[6] Atul Thakur, Why are High Income Tax Rates so unjust in India?, TOI, (Feb 12, 2020), https://timesofindia.indiatimes.com/business/india-business/why-high-income-tax-rates-are-so-unjust-in-india/articleshow/70174392.cms

^[7] Ibid

^[8] Prasanna Mohanty, Coronavirus Lockdown XII: Why the wealthy should be taxed more, Business Today, (May 6, 2020),

https://www.businesstoday.in/current/economy-politics/coronavirus-lockdown-indias-wealthy-tax-government-npas-bad-loans-super-rich-black-money/story/402967.html

^[9] Sai Manish, Google, Facebook made Rs 10,000 crore; paid Rs 200 crore as tax in India, Business Standard, (Jul 9, 2019), https://www.business-standard.com/article/companies/google-facebook-made-rs-10-000-crore-paid-rs-200-crore-as-tax-in-india-119062700393_1.html

^[10] Sai Manish, Google, Facebook made Rs 10,000 crore; paid Rs 200 crore as tax in India, Business Standard, (Jul 9, 2019),

https://www.business-standard.com/article/companies/google-facebook-made-rs-10-000-crore-paid-rs-200-crore-as-tax-in-india-119062700393_1.html

^[11] Supra, note at 6.

^[12] Supra, note at 9.

^[13] S Subramaniam, Doing the maths: Why India should introduce a Covid wealth tax on the ultra rich,The Scroll, (Apr 16, 2020), https://scroll.in/article/959314/doing-the-maths-why-india-should-introduce-a-covid-wealth-tax-on-the-ultra-rich