The Real Picture: Taxpayer Population in India Post-Demonetization

The statement that only 1% of India's population pays income tax is an oversimplification. While it is true that a relatively small percentage of the population file income tax returns, the actual figure is higher. As of the latest data up to 2023, estimates suggest that around 3% to 5% of India's population were income taxpayers. However, it's important to note that various factors, including a large informal economy, low average income levels, and tax compliance issues, contribute to the reality of these numbers.

Why is the Number of Income Tax Filers Low?

The primary reason for a low number of income tax filers is the presence of a substantial informal economy. Numerous businesses and even affluent families operate without formal recognition, leading to a lack of tax filings. Additionally, low average income levels mean that many Indians do not meet the income threshold for filing taxes. Furthermore, tax compliance issues compound this problem, as many people and businesses choose not to report their income due to a lack of understanding or aversion to the tax system.

The Impact of Demonetization

However, the situation has seen improvements since the introduction of demonetization. Demonetization, initiated in 2016, significantly impacted the number of tax assesses. After six decades, the number of tax assesses almost doubled. This was an obvious economic benefit of India, as black money deposited was now being collected through taxes. According to the India Economic Survey 2018, demonetization brought in approximately 10 million new taxpayers to the Indian tax base.

Understanding Indian Tax Culture

The issue is not just limited to the economy but extends to the cultural and behavioral aspects of the population. In India, there's a prevalent mentality that encourages bargaining and seeking subsidized prices, extending to tax payments as well. Many people do not pay taxes when purchasing items, engaging in practices like paying without a bill or showing a lesser amount. This mentality has its roots starting from childhood, as bargaining is a common practice in many Indian households.

Comparative Analysis: Ethiopia

Contrastingly, in countries like Ethiopia, people are more willing to pay taxes and see it as a way to contribute to the development of their nation. This can be attributed to several factors, including enhanced tax transparency and accountability. For instance, Ethiopia has a robust system where customs and revenue authorities are connected to cash register machines, ensuring that all sales are recorded. A valid business license can only be obtained if a taxpayer has a TIN number and a connected CR machine, with daily sales processed through these machines.

Implications for India

To improve tax compliance in India, similar measures need to be introduced. For instance, implementing a sales register machine for all businesses with annual sales over 5-10 lakhs could significantly increase tax collections. However, this also poses a significant challenge, as some business owners and shopkeepers have expressed resistance to such measures. The historical aversion to tax payment and fear of potential legal repercussions can make it difficult to implement such policies.

Conclusion

While the number of income tax filers in India remains relatively low, the government's efforts, such as demonetization, have shown positive results. To further improve tax compliance, it's essential to address cultural and behavioral barriers and create systems that ensure transparency and accountability. By understanding these challenges and working towards overcoming them, India can enhance its tax base and contribute to its economic growth.