The concept of income tax and how it doesn’t affect those who are rich and those who are poor has been discussed a lot over the past few years. The topic of how these taxes seem to be heavier on those from the middle and lower income groups while barely making a dent in the wealth of the uber-wealthy has been brought up a lot.
Several experts and analysts have also talked about how the super-rich in the country take certain measures that let them retain their wealth and not pay as much tax as they should. Something similar was noted by a research study conducted by a member of the RBI’s Monetary Policy Committee based on the 2023 election results and data from various sources.
What Did The Study Reveal?
Ram Singh, a member of the RBI’s Monetary Policy Committee, in January 2023, conducted a study called “Do the Wealthy Underreport their Income? Using General Election Filings to Study the Income-Wealth Relationship in India.”
The analysis used data from the Lok Sabha election candidates’ affidavits, the Forbes rich list, and data from the Indian Tax Department to determine how the super-rich people in India report a much lower income relative to their wealth.
According to the study, the capital income of many wealthy individuals often goes unreported in official income tax records. In his research, Singh claims that even to date, the “income reporting behaviour of different wealth groups” is still an area that is “under-researched in the Indian and international contexts.”
Read More: DemystifiED: Why Very Few Indians Pay Income Tax
His study claims that “the wealthier the individual or the family, the lesser the reported income relative to wealth.” It is further claimed that there is a relation between a family’s wealth and their reported income, where a 1% increase in the former leads to a 0.5% decrease in the latter.
The study states, “The total income reported by the bottom 10% of families in the data amounts to more than 188% of their wealth; in contrast, the wealthiest 5% [respectively 0.1%] of families reported incomes that were just 4% [respectively 2%] of their wealth.”
The research alleges that almost 80% of the capital income of the wealthiest 0.1% of families is not reported in their income tax returns, with only about a fifth of the returns from their capital reported in official documents. “Tax paid by these groups relative to their wealth is smaller than the relative tax liability for middle-wealth groups,” it states.
The study also claims, “Incomes reported by the bottom 10% of wealth groups are several times their wealth. In contrast, income levels reported by the groups at the top of the wealth pyramid are a minuscule fraction of their wealth. The reported income relative to wealth decreases continuously until it is reduced to a negligible fraction of wealth for super-wealthy groups… We expect the income-to-wealth ratios to decrease with wealth. Yet, the income-wealth ratios reported by wealthy Indians seem to be inexplicably low.”
It also states that “… ipso facto, reported income decreases with the share of agricultural land and commercial properties across wealth groups. This finding and the available evidence indicate that many taxpayers across all wealth groups misreport a part of their taxable labour income as tax-free agricultural income and underreport their rental income. On this count, the problem of tax evasion is acuter for the middle and above-average wealth levels, given the dominance of farmland and property in asset portfolios.”
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Sources: The Economic Times, The Hindu, World Inequality Database
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