News Update

Start-Up Certification - Time to brood over!PM shares 3Ts mantra at NITI Aayog Meet - Trade, Tourism & TechnologyFake Invoicing under GST - A clarity searchTata Motors buying Ford India’s factory for Rs 725 CrI-T - Recovery of demand from company directors cannot be resorted to where no satisfaction is recorded about tax not being recoverable from company: HCUS Senate passes Biden’s Inflation Reduction Bill - USD 369 bn for climate actionI-T - Refund payable to an assessee cannot be withheld solely because notice u/s 143(2) has been passed & where no valid reason is given: HCTurkish banks embrace Russian payment systemI-T - Transfer of assessment is invalid where assessee is not given personal hearing before transfer : HCCOVID - 2.15 lakh cases with 161 deaths in Japan + 1.06 lakh cases with 27 deaths in S KoreaI-T - Disallowance of payment on grounds of unexplained gift is upheld where intention to gift money is not clearly established due to entire transaction not being through banking channels : HCNew Colombian President calls for new global strategy to deal with drugs problemI-T - Words 'a one residential' mentioned in Section 54 refers to only one house which can be purchased or constructed and can not be interpreted as 'more than one house' : ITATNigeria to recover lost Benin Bronzes to be returned by London’s Horniman MuseumI-T - Assessee is not required to deduct TDS at time of payment of EDC to HUDA : ITATChina’s military drill simulates assault on Taiwan’s main islandI-T - Amended provisions of Section 54F do not have retrospective effect: ITATCOVID - Positivity rate soars close to 15%; Delhi reports over 2400 fresh cases on SundayST - Matter has been adjourned more than three times, but none appeared on behalf of appellants, thus appeal dismissed for non-prosecution: CESTATIndia to have over 40 Cr air travellers by 2027: ScindiaCX - When sale of goods is on FOR basis, central excise duty cannot be charged on cost of freight from their premises to premises of buyer: CESTATMega blaze at Cuban oil installation - 1 dead; 121 injured & 17 missingCus - Since amount was lying in nature of pre-deposit with department from date of encashment of Bank Guarantee, appellant is entitled to interest from said date under Section 129EE @ 12% p.a.: CESTATLightning strikes - 9 die; 2 hospitalised in MPST - Mere fact that differential amount of service tax was paid by service provider on being pointed out doesn't establish that tax was short paid or was not paid by reason of fraud, suppression or misstatement with an intent to evade payment of service tax: CESTATP Chidambaram alleges India’s institutions are captured & democracy running out of puffCX - The manufacturer/dealers issued only invoices and no goods were dispatched by them with invoices, assessee failed to comply with provisions of Credit Rules, therefore, not entitled to take CENVAT credit on strength of invoices which were not genuine: CESTATIndia, US to conduct high-altitude joint training in Auli near China borderGovt appoints N Kalaiselvi, first woman, to head CSIRUS commits to defend Philippines in case of attack in South China SeaExport of processed food up by 31% to USD 7408 mn in 3 monthsIncome Tax raids mutual fund house in Mumbai
Personal Income Tax Liability Threshold Vs Per Capita Income: The India Story

JULY 25, 2022

By J B Mohapatra

PERSONAL Income Tax (PIT) liability and how many met that compliance is generally reflected in the Income Tax Return (ITR) filings by taxpayers through ITR-1, ITR-2, ITR-3 and ITR-4, ITRs designed for individual taxpayers who have a PIT liability. Taken together, these 4 ITRs do the heavy lifting, as far as ITRs numbers go, for the Income Tax Department. Last FY, out of a total of 71.4 million ITRs, these 4 categories accounted for 68.4 million or 95.8% of the gross number of ITRs. For FY 2018-19, 19-20 and 20-21, the proportion stood at 95.6%, 95.8% and 93.44% respectively. The filing numbers have traditionally raised few questions principally whether the numbers reasonably match or correspond to the size of the country's population. One is generally persuaded to believe that either singly or in association with other elements, factors such as (a) constitutional bar on the central government and statutory exemption from imposing tax on agricultural income, a line of activity which engages more than half of the population (b) lack of research and attention to the tax challenges of a massive informal sector (c) general lack of awareness about legislation, regulation and tax administration, are germane to the low ITR filing. Persuasive as these reasons are, the asymmetry between the per capita income and threshold PIT liability has also emerged as one of the key determinants in any discussion on ITR filing.

Of course per capita income is not the lone factor driving the gross tax revenue or ITR filing behaviour, since other macro-economic factors such as adequacy of employment opportunities, scale and nature of industry sector where employment opportunities are opening up, education, inflation, corruption, trade and investment openness, structural strength and weakness of the tax administration and finally the tax rate do count in the eventual algorithm. However, among all the listed factors, per capita income has strong, natural and significant causal connection with tax revenue growth or retardation. Lotz and Mors (1967), Shin (1969), Purohit (2006) and Bahl (1971) in their researches have all confirmed to this strong causal corelation between per capita income and tax revenue. There is now a general consensus without exception that increase in per capita income provides the individual a stronger motivation and necessary wherewithal to file his ITR, pay taxes and get engaged in the taxation process.

Seen in this context, India's per capita income (globally ranked at 149th position among all countries) as per World Bank report of 2021 went up from USD 1,358 in 2010 to USD 2,277 in 2021 or from Rs 61,137 to Rs 1,66,676. In the same period, threshold levels of PIT liability rose from Rs 1,60,000 in FY 2010-11to Rs 2,50,000 in FY 2020-21. If we factor in rebate of Rs 12,500 under section 87A for determining PIT liability for total income not exceeding Rs 5,00,000 vide Finance Act 2020, there is zero PIT liability for a total income not in excess of INR 5,00,000. Measured as paired co-factors, PIT liability threshold which stood at 2.60 times of per capita income in 2010 is close to 3 times (300%) of per capita income in 2021.

Contrast India's position with few random selection of advanced economies and emerging economies and how their PIT liability stack up against their per capita income:

Per Capita Income In USD- 2021
Threshold PIT in USD- 2021
Threshold PIT as a % of per capita income

It is undeniable that there are serious policy implications in devising PIT liability thresholds in the manner these are crafted, and more so in the context of socio-political needs and economic compulsions of developing and lower middle income countries , and in the manner the burden ratios of individual PIT liability while incrementally pushing the tax revenue growth are worked out in a manner that they do not adversely impact the minimum livelihood requirements or exceed the tolerance range of taxpayers. This is the underlying ratio behind configuring PIT thresholds across all economies. High and upper middle income economies and developed economies generally have a threshold PIT sufficiently below their per capita income range, while emerging economies including lower middle and low income jurisdictions have an altogether different matrix of constructing the threshold PIT liability. Size of the population, any perceived porosity in its institutional frameworks, largeness of its informal sectors and above all, basic economic compulsions would have contributed, as in India's case in devising a typical threshold PIT much higher than the country's per capita income. Furthermore, capacity of the tax administration to ensure that tax legislations on PIT are enforced with due rigour including factoring in costs on monitoring compliance behaviour, automation of processes and setting up institutional arrangements for a very large size pool of individuals is a critical design driver in fixing threshold levels of PIT liability.

Summing up, PIT liability threshold allows for rudimentary levels of consumption and frees low income individuals from PIT. On average, in low income developing countries, an individual needs to earn 1.3 times of its GDP per capita to be liable for PIT contrary to 0.8 times for emerging economies and 0.2 times for developed economies. Though an outlier to the general rules for decoding the relationship between PIT threshold and per capita income, India did have its special socio-economic reasons and a typical dispensation for devising a PIT threshold level almost 3 times its per capita income. While this, apart from other compelling factors, explains the present lower volume of ITR filing, international experience tells us that as India's economy gets bolstered and per capita income rises, tax base on which PIT is levied also expands with corresponding refinements in institutional arrangements and technological enablement by the tax administrators and higher quality policy design for integrating a larger mass of taxpayers to the taxation process. Till such time, the per capita income must be allowed to creep closer to the existing PIT liability threshold before we start off on a fresh review of the threshold.