The middle class in India often feels weighed down by high income taxes. While they pay their dues, many others avoid the tax net entirely. This situation frustrates the compliant taxpayers who use tax-paid services daily. So, just how much tax revenue is missing because many people aren’t paying up? A rough calculation puts the tax evasion and exemptions at around ₹8 lakh crore for the financial year 2020-21. To put that in perspective, India’s total budget for that year was about ₹27 lakh crore.
But who exactly qualifies as middle class? According to a report by the People Research on India’s Consumer Economy, those with household incomes between ₹5 lakh and ₹30 lakh belong to this group. This data suggests that approximately 432 million people fall into this income range in India.
Next, let’s estimate how many of these individuals are actually taxpayers. Taking into account that an average household has around 4.4 members and assuming one taxpayer per household, we can estimate that there are about 98 million potential taxpayers. However, data from the Income Tax Department for the same year shows that only around 15 million tax returns were filed in this income band. This means nearly 83 million middle-class individuals might not be paying any taxes at all.
So, what does this mean for the country in terms of lost revenue? Those who did file returns in the ₹5-30 lakh income range contributed roughly ₹1.41 lakh crore in tax. If everyone eligible had paid, the total could have reached about ₹7.8 lakh crore. That amount equals nearly 30% of India’s 2020-21 budget. A significant part of this loss is due to tax exemptions in agriculture, which affects revenue from wealthier individuals as well.
For years, governments have struggled to include those outside the tax net. But today, with access to big data, there’s a chance to change that. Instead of targeting compliant taxpayers with new burdens, the focus should shift to encouraging the unaccounted to contribute fairly. After all, a country that successfully implemented UPI and managed a widespread vaccination drive should be able to enhance tax compliance effectively.
Unfortunately, many feel discouraged. The sentiment among taxpayers is shifting; some even believe that being honest is a disadvantage. As Charlie Munger wisely put it, “Show me the incentive, and I will show you the outcome.” If legitimate taxpayers begin to think about going underground, it could spell trouble for the country’s economy.
Monika Halan is a well-known author focused on financial literacy.
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