Share of personal income tax and indirect tax shows increase

Over the last week, during the election campaign, the Congress’ manifesto and the party’s emphasis on social justice and welfare were suddenly thrust into the limelight. Prime Minister Narendra Modi sought to give the Congress’ demand for a caste census and its plans to study distribution of surplus government land to the poor, among others, a communal turn. The Congress defended its manifesto saying the rising wealth inequality in the country needs to be addressed and dismissed Mr. Modi’s claims that its plans intended to favour a particular religious group. In the midst of this political controversy, the chairman of the Indian Overseas Congress, Sam Pitroda, floated the idea of an inheritance tax, which is not in place in India and is also not mentioned in the Congress’ manifesto.

Almost concurrently, as this political debate was playing out, the Finance Ministry released provisional data that showed an uptick in net tax collections. This is mostly driven by an increase in personal income tax and securities transaction tax collections. On the other hand, collections from net corporate taxes have reduced marginally. The data also show that revenues from personal income tax and securities transaction tax grew at almost double the pace compared to revenues from corporate taxes last year.

We look at some numbers to provide context to the ongoing debate and the recent release of tax data.

Chart 1 | the chart shows corporate tax and personal income tax as a share of gross tax revenue, as of February every year.

Chart appears incomplete? Click to remove AMP mode

As can be seen from the chart, the share of corporate tax has been on a decreasing trend, while that of personal income tax has been increasing. As of February 2024, the gap between the two tax shares further increased, with income tax forming 28% of the gross tax — a new peak. The sharp fall in corporate tax after FY19 can be attributed to the deep corporate tax cuts introduced by the Bharatiya Janata Party-led government in September 2019.

The data also show that the share of direct taxes has been decreasing, while that of indirect taxes has been increasing. Direct taxes, which include taxes levied directly on the incomes of corporations and individuals, are said to be “progressive” because those who earn less are taxed less and vice-versa. On the other hand, indirect taxes, which include union excise duties and the Goods and Services Tax are considered “regressive” as all consumers, regardless of their income levels, pay the same amount.

Chart 2 | The chart shows the share of direct and indirect taxes in the combined tax revenue receipts of the Centre and the States across years.

As can be seen from the chart, the share of indirect taxes, which had been falling steadily since the 1980s, has increased in the past decade. On the other hand, the share of direct taxes, which had been increasing, has consistently recorded a downturn in recent years.

Chart 3 | The chart shows the annual income bracket-wise share in total income tax returns filed (blue) and the share in total amount of income tax paid (red). Figures in %

Importantly, Chart 3 shows that a bulk of those who file personal income tax earn an annual income of ₹1 lakh-₹5 lakh. Richer individuals who earn more than ₹50 lakh are few and far between.

Moreover, a comparison with BRICS economies, for which data are available, shows that the effective personal income tax rate in India is among the highest (Chart 4).

Chart 4 | The chart compares the effective personal income tax rate in India with other BRICS countries which had data. 

Note: In case a country had two tax regimes, the highest effective tax rate was considered for comparison

Put together, the data show that poorer citizens and those in the middle-class category are increasingly shouldering a higher share of the tax burden. This is due to the combination of the rising share of personal income tax and indirect taxes in total revenue.

Rachita Rabboni is interning with The Hindu Data Team

Source: Centre for Monitoring Indian Economy, Controller General of Accounts, PricewaterhouseCoopers (PWC)

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Japan’s Prime Minister Fumio Kishida delivers his policy speech during an extraordinary session of the Diet at the parliament in Tokyo on October 23, 2023. Photo: Kyodo News via AP

Japan’s Prime Minister Fumio Kishida said on October 23 he is preparing to take bold economic measures, including an income tax cut for households hit by inflation and tax breaks for companies to promote investment, in what’s seen as a move to lift his dwindling public support.

In his speech to start a new Parliamentary session, Mr. Kishida said it was time to shift from an economy of low cost, low wages and cost-cutting to one backed by growth led by sustainable wage hikes and active investment.

“I’m determined to take unprecedentedly bold measures,” Mr. Kishida said, pledging an intensive effort to achieve stronger supply capability in about three years.

“I will put more emphasis on the economy than on anything else.” He said he is determined to help people ride out the impact of soaring prices for food, utilities and other costs that have exceeded their salary increases, by implementing income tax cuts. He also pledged to introduce corporate tax incentives to promote wage increases, investment and optimisation.

Previously, Mr. Kishida had been considered reluctant to cut taxes because his government must find the funds to double Japan’s Defence budget within five years as planned while also trying to counter the impact of Japan’s low birth rate and rapidly declining population.

Mr. Kishida’s pledge on tax breaks has been criticised by Opposition leaders as a vote-buying attempt because the proposals surfaced just before two by-elections held on Sunday that were seen as a litmus test for potential snap elections.

His Liberal Democratic Party secured a parliamentary seat representing Nagasaki in Sunday’s vote but lost in a combined district in Kochi and Tokushima to a candidate backed by the main opposition Constitutional Democratic Party of Japan.

“The results clearly show that many voters are dissatisfied by the government’s delayed economic measures to tackle rising prices,” said Jun Azumi, a senior CDPJ lawmaker.

Mr. Kishida told reporters that he takes the results seriously and that he will tackle important policies one by one.

“Now is the time for me to focus on that, and I’m not thinking about anything else,” Mr. Kishida said, denying that his tax cut proposal was related to elections.

The tax cuts would be part of a new economic stimulus package he plans to announce by the end of the month.

On the diplomatic front, Mr. Kishida in his speech reiterated the need to strengthen Japan’s military, given conflicts that are underway elsewhere, such as Russia’s invasion of Ukraine and the war between Israel and Gaza’s militant Hamas rulers.

Mr. Kishida also urged China to immediately lift its ban on Japanese seafood imports imposed in August when the tsunami-wrecked Fukushima Daiichi nuclear plant started releasing the treated radioactive wastewater into the sea.

The government is working to find new markets for the Japanese fishing industry that are less reliant on China, Mr. Kishida said.