by Vivek Kaul
Furthermore, the limit of Rs. 1.5 lakh applied only to self-occupied property, and not to other homes that a taxpayer could have chosen to buy by taking on a home loan. Any amount of interest paid on such home loans could have been claimed as a deduction as long as a ‘notional rent’ was added to the income.
Getting back to the point, there were only 6.06 lakh individuals in the assessment year 2012-2013 who had a negative income from house property. As I had said, these were people essentially repaying their home loans.
It is worth asking whether, during 2011-2012, India had less than 6.06 lakh individuals living in self-occupied homes on which home loans were being repaid. Something just doesn’t add up here. Honestly, this is bizarre! In 2011, the number of home loan accounts with banks had stood at 47.3 lakh. This went up to 47.8 lakh in 2012.563
The Reserve Bank of India (RBI) puts out the sectoral deployment of credit data for the scheduled commercial banks at the end of every month. During 2011-2012, scheduled commercial banks gave out home loans worth Rs. 41,907 crore. In 2012-2013, the average home loan financed by banks was Rs. 10 lakh. I couldn’t find an average home loan number for 2011-2012, and hence, will have to work with this.564
Let’s assume that, in 2011-2012, the average home loan financed was 10 per cent lower, at Rs. 9 lakh, than in comparison to 2012-2013. This essentially means that, in 2011-2012 alone, around 4.66 lakh homes (Rs. 41,907 crore divided by Rs. 9 lakh) were financed by scheduled commercial banks.
Over and above banks, housing finance companies also give out home loans. Hence, it is safe to say that, just in 2011-2012 alone, more than six lakh home loans would have been given out. Furthermore, the number of outstanding home loan accounts in the country in 2011-2012 would have been greater than 47-48 lakh when we take into account the home loans given by housing finance companies as well. Of that, only a figure of 6.06 lakh is visible in the income tax data. You should be able to see why I say that things don’t add up here.
e)Also, 19.95 lakh people declared a positive income from house property in the assessment year 2012-2013. This is another extremely low number. This means that the number of individuals in India who were earning a rental income from their homes (real as well as notional) during that year was around 20 lakh. So there were only around 20 lakh landlords in the country, if the data from the Income Tax Department is to be believed. How is that possible?
It is worth recounting here something that Akhilesh Tilotia writes in The Making of India which is based on the Census data: “India’s households increased by 60 million [6 crore] to 247 million [24.7 crore] from 187 million [18.7 crore] between 2001-2011. Reflecting India’s higher ‘physical’ savings, the number of houses went up by 81 million [8.1 crore] to 331 million [33.1 crore] from 250 million [25 crore]. The urban increase is telling: 38 million [3.8 crore] new houses for 24 million [2.4 crore] new households.”565
This means that India had 331 million, or 33.1 crore, houses in 2011. Now compare this with the deduction that there are only around 20 lakh individuals earning a rental income from their homes. This comparison clearly tells us how low the 19.95 lakh figure really is.
There are two things that become clear here. One is that many individuals are just buying up homes as an investment and not putting it up for rent. Anshuman Magazine, Chairman and Managing Director of CBRE South Asia Pvt. Ltd., in a 2015 article, wrote that “around 1.2 crore completed houses” are “lying vacant across urban India”.566
The fact that so many homes have been bought and are lying vacant is another manifestation of black money. A good proportion of black money finds its way into real estate, where it’s perhaps easiest to hide it these days. Secondly, this is a clear indication of the fact that most landlords are getting their rents paid in cash and not paying any income tax on it. It also leads to the question: Where did these people earn the money to build/buy these houses in the first place?
Here is another interesting data point: Of the 19.95 lakh who had some rental income, around 14.55 lakh had an average rental income of around Rs. 60,000 per year, or Rs. 5,000 per month. This figure seems to be low and out of tune with the prevailing rents. People paying income tax primarily live in the big cities, and such a low rent in a big city is practically unheard of.
The point being that a major part of the black money in India continues to be generated in the real estate sector. The general impression we have had until now is that black money is generated when real estate is bought and sold. Nevertheless, with this new data, it is very clear that black money is also generated even when real estate is rented out.
f)We can also use the data released by the Income Tax Department for the assessment year 2012-2013 to calculate the effective rate of individual income tax in India for that year. We all know that there are three income tax slabs for the taxation of individuals – 10 per cent, 20 per cent and 30 per cent – with a higher rate being applied as the income goes up. Nevertheless, precisely what proportion of income the government is actually able to collect as tax after all the deductions and exemptions are applied is an interesting question to answer.
Table 9.1: Effective rate of Income Tax for individuals for the assessment year 2012-2013.
Source of Income Income
(in Rs. crore)
Salary 6,27,200
House Property Income 29,927
Business Income 4,03,251
Long-Term Capital Gains 30,479
Short-Term Capital Gains 3,290
Income from Other Sources 1,28,020
Income from Interest 44,918
Total Income 12,67,085
Total Tax Collected 1,14,555
Effective Rate of Income Tax 9 per cent
Source: Income Tax Department, Income Tax Returns Statistics.
Take a look at Table 9.1. For the assessment year 2012-2013, individuals declared a total income of Rs. 12,67,085 crore. On this, an income tax of Rs. 1,14,555 crore was collected. This means an effective rate of 9 per cent. Hence, the effective rate of income tax was lower than even the lowest rate of tax, at 10 per cent. This is clearly a reason for the government to worry.
The effective rate of income tax was lower than even 10 per cent, given that there were enough deductions and exemptions available to taxpayers to bring down their taxable income. The revenue foregone by the government due to all the deductions and exemptions on offer to income taxpayers in 2015-2016 had stood at around Rs. 55,367 crore, up from Rs. 49,206 crore a year earlier. The government foregoes a lot of revenue due to exemptions and deductions on offer on corporate income tax, excise duties and customs duties as well. These amounts are significantly more than the revenue that the government foregoes on individual income tax.
Other than the government having to forego tax, all the deductions and exemptions make things complicated for even the income tax officers. As Arun Kumar writes in The Black Economy in India: “The tax laws are far too complex to be implemented meaningfully. No income tax officer can have the time to properly scrutinise the return submitted by even a small businessman or even a professional. Taking advantage of this, those who wish to evade income tax submit incorrect returns, and then bribe the officer to have them accepted.”567
Kumar’s book was published in 1999. Things have changed since then, and much of the income tax returns filing has now gone online. This basically means that any anomalies can be caught more quickly than was the case in the past. Also, in conversations I have had with chartered accountants, it has been suggested that, as more and more of the financial system goes digital, investing black money has become more difficult. Hence, we are moving in the right direction.
Nevertheless, no effort has been made to cut down Big Government in this area by simplifying the Income Tax Act of 1961 to the point where it is easy for the authorities to catch those fudging on their tax returns.
This can basically be done by doing away with various deductions and exemptions. At the same time, different forms of income should be treated in the
same way, and hence, taxed in the same way. The original version of the Direct Taxes Code (2009) came close to achieving this. But given that it would have put most chartered accountants out of business and closed extra money-making opportunities for the officials of the Indian Revenue Service, not surprisingly, it never became a law.
g)If all this isn’t enough, there is more evidence to the fact that there is a lot of black money in India. In the assessment year 2012-2013, around 2.88 crore Indians filed income tax returns. Of these, nearly 56.4 per cent, or 1.62 crore, did not pay any income tax. The rest, i.e., around 1.26 crore individuals, did pay income tax.
Of the 1.26 crore who paid income tax, nearly 1.11 crore individuals, or 89 per cent, paid an income tax of less than Rs. 1.5 lakh for the assessment year 2012-2013. In total, these individuals paid an income tax of Rs. 23,446 crore. This works out to an average of Rs. 21,069 per individual. Of course, the median tax paid would have been even lower than this.
Hence, 89 per cent of those who paid tax in India for the assessment year 2012-2013 paid an average income tax of just over Rs. 21,000 for the year. This means an average income tax of less than Rs. 2,000 per month.
This means that around 14 lakh Indians (13.9 lakh, to be precise) actually got around to paying a large proportion of the total income tax in 2012-2013. They paid around Rs. 91,109 crore of the total income tax. It is safe to say here that the average Indian does not pay income tax.
Now let’s compare this to some consumption figures, in order to show that the number of Indians paying income tax is actually way too low. Take the case of car sales. In 2011-2012, around 25.34 lakh cars were sold.
What does this tell us? In a country where around 13.9 lakh individuals actually paid a large chunk of income tax, 25.34 lakh cars were sold during the course of the same year. In fact, the number of cars being sold has continued to be in the range of 23.4-25.6 lakh a year since then. This basically tells us that many people who are buying cars are not paying any income tax.
Furthermore, 30,000 luxury cars are sold in India every year. In 2014, both Audi and Mercedes sold more than 10,000 cars in India. A February 2015 report published by the business lobby FICCI makes a similar point. The report estimates that the number of dollar millionaires (i.e., with assets of Rs. 6 crore or more) in India in 2014 had stood at around 2.27 lakh, up from 2.14 lakh in 2013. But the number of taxpayers with a taxable income of more than a crore was less than 50,000.
When I first wrote about this in a regular column, readers came up with a wide range of explanations to justify why this was nowhere as surprising as I was making it out to be. Some said there were many Non-Resident Indians (NRIs) whose parents had cars. Some others talked about companies helping employees buy cars as a form of tax planning. Still some others said that the rich have more than one car and keep buying cars frequently. Or the fact that many luxury cars were bought in the name of businesses, and so on.568
While each of these explanations is valid on its own, on the whole, these reasons are not persuasive enough to explain the fact that, in a country where around 13.9 lakh individuals pay a bulk of the tax, nearly 25 lakh cars are sold every year.
One reason for this could be that those earning their income from agriculture, which is tax free, are buying cars. Again, the question is: Just how many cars can they actually buy every year? The other (and more likely) reason is that cars are being bought with money on which income tax has not been paid, i.e., cars are being bought with black money.
Also, if we look at the income distribution of the salaried individuals paying income tax, around 20.2 lakh people had declared incomes between Rs. 5.5 lakh and Rs. 9.5 lakh for the assessment year 2012-2013. But the total number of cars sold in 2011-2012 had stood at greater than 25 lakh. It is safe to say here that those buying cars are earning at least Rs. 5 lakh per annum. The question is: Who is buying these cars then?
In short, it is safe to come to the conclusion that a significant proportion of the cars is being bought by those who have black money. The good news is that it shouldn’t be very difficult for the income tax authorities to figure out who these people are, given the information technology infrastructure that is available these days. Of course, it may not be feasible for them to go after each and every such individual.
The common impression is that all black money does not get counted while calculating the GDP, and hence, the official size of the Indian economy is lower than its real size. That is not totally correct. When an individual who has black money buys a car, or a consumer durable for that matter, using black money, some part of it does get reflected in the GDP. Also, for a long period of time, black money has found its way into post office savings schemes as well as life insurance policies. The money thus invested has found its way into productive investments, the value added by which does get reflected in the GDP.
h)The Income Tax Department also provides detailed data on the income of individuals under the headings of salary, business income, other income, short-term capital gains, longterm capital gains and income from interest.
Take a look at the Table 9.2(a). This tells us that the average income of the individuals who filed an income tax return in 2012-2013 was around Rs. 4.40 lakh.
Table 9.2(a): Sources of income for individuals and total amounts earned under them during the assessment year 2012-2013.
Income Source Total Amount
(in Rs. crore)
Salary 6,27,200
House Property Income 29,927
Business Income 4,03,251
Long-Term Capital Gains 30,479
Short-Term Capital Gains 3290
Other Sources of Income 1,28,020
Interest Income 44,918
Total (in Rs. crore) 12,67,085
Total Number of Returns 2,87,66,266
Average Income Rs. 4,40,476
Source: Income Tax Department, Income Tax Returns Statistics.
How do things look if we look at just the salaried class? Take a look at Table 9.2(b).
Table 9.2(b): Average income of the salaried class during the assessment year 2012-2013.
Total Salary (in Rs. crore) 6,27,200
Number of Returns Filed (Salaried Class) 1,16,76,493
Average Income Rs. 5,37,148
Source: Income Tax Department, Income Tax Returns Statistics.
As can be seen from Table 9.2(b), around 1.17 crore income tax returns were filed by the salaried class. The average income of the salaried class in India who filed income tax returns in 2012-2013 was Rs. 5.37 lakh. This is around 22 per cent more than the overall average income of the individuals who filed income tax returns that year.
It is important to understand here that most of the individuals who belonged to the salaried class during 2012-2013 would have had an income lower than the average income of Rs. 5.37 lakh. In order to understand this, we will have to take a look at the data in a little more detail.
Let’s divide the data into two parts: those who earned up to Rs. 10 lakh and those who earned more than Rs. 10 lakh. Let’s consider those who earned up to Rs. 10 lakh first. The total number of returns filed by the salaried class was around 1.17 crore. Of this, close to 1.06 crore had salaried incomes of up to Rs. 10 lakh. This means that around 91 per cent of the salaried class who filed income tax returns in 2012-2013 had an income of up to Rs. 10 lakh. Take a look at Table 9.3.
Table 9.3: Salary brackets of less than or equal to Rs. 10 lakh.
Salary (x)
(in Rs. lakh) Number of Returns Total Salary Income
(in Rs. crore)
0 < x ≤ 1.5 16,00,167 14,956
1.5 < x ≤ 2 10,67,300 18,853
2 < x ≤ 2.5 10,24,315 23,120
2.5 < x ≤ 3.5 19,18,714 57,075
3.5 < x ≤ 4 8,06,685 30,215
4 < x ≤ 4.5 7,54,202 32,048
4.5 < x ≤ 5 6,96,210 33,032
5 < x ≤ 5.5 5,95,298 31,190
5.5 < x ≤ 9.5 20,23,583 1,40,464
9.5 < x ≤ 10 1,00,
155 9,760
Total 1,05,86,629 3,90,713
Average Income Rs. 3,69,063
Source: Income Tax Department, Income Tax Returns Statistics.
The average income of those earning up to Rs. 10 lakh was Rs. 3.69 lakh. This is significantly lower than the overall average income of Rs. 5.37 lakh of the salaried class filing income tax returns. How do things look for those earning an income of up to Rs. 5 lakh? Now take a look at Table 9.4.
The average income of those earning less than Rs. 5 lakh was around Rs. 2.66 lakh. These individuals formed more than two-thirds of the overall salaried class filing income tax returns in 2012-2013.
How do things look for those earning more than Rs. 10 lakh per year? The average income of those earning more than Rs. 10 lakh came out to around Rs. 21.7 lakh, which is significantly greater than the overall average of Rs. 5.37 lakh for the salaried class that year.
Table 9.4: Salary brackets of less than or equal to Rs. 5 lakh.
Salary (x)
(in Rs. lakh) Number of Returns Total Salary Income
(in Rs. crore)
0 < x ≤ 1.5 16,00,167 14,956
1.5 < x ≤ 2 10,67,300 18,853
2 < x ≤ 2.5 10,24,315 23,120
2.5 < x ≤ 3.5 19,18,714 57,075
3.5 < x ≤ 4 8,06,685 30,215
4 < x ≤ 4.5 7,54,202 32,048
4.5 < x ≤ 5 6,96,210 33,032
Total 78,67,593 2,09,299
Average Income Rs. 2,66,027
Source: Income Tax Department, Income Tax Returns Statistics.
What do these tables tell us? That the average salaried Indian who files income tax returns doesn’t earn much. As mentioned earlier, around 91 per cent of the salaried class had an average income of Rs. 3.69 lakh. More than two-thirds had an average income of Rs. 2.66 lakh.
This basically means that the income of the average salaried Indian filing an income tax return is significantly lower than both the overall average salaried income as well as the overall average income. At least that is how things were for the assessment year 2012-2013.