As a member of the BRICS, India has aspirations to become an economic superpower and a driver of global economic growth in the coming decades. But that transition will take time.
Only 3% of India’s population of 1.2 billion pays income tax. That means 36 million people support the other 1,164,000,000.
The question is how does India compare with developed economies? In the US, the IRS (the taxman) estimated in 2008 that 36% of American households had no tax liability. In the UK, the HMRC estimates the number of people paying income tax came down from 32 million in 2008 to 29 million in 2010 – around 50% of the population.
There are three clear reasons for India’s discrepancy. First, the average salary is 50,000 rupees (£575) – less than one third of the income-tax threshold of 180,000 rupees (£2,070). Second, agricultural labour is tax-exempt and that sector accounts for around half the total workforce. And third, there is a culture of tax avoidance that would make an offshore banker blush – one recent estimate put the cost to India’s economy at 14 trillion rupees ($160 billion). An economics professor in New Delhi has worked out the cost to the economy from tax avoidance and corruption at around five percentage points a year.
So just a little bit of effort into stemming tax evasion could transform India’s economy and market. And it’s much needed too – the rupee just hit an all-time low against the US dollar.
Ross Hunter, 10 June 2013
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