Rich splurge millions, yet don’t pay taxes!

Every nation needs to collect taxes to carry out developmental activities and provide some kind of security to the weaker section of society. Think: India’s population is nearly 1.25 billion, but tax payers’ account for hardly 1 per cent wherein any increase in indirect taxes hurt the poor badly.

On the other hand, sale of luxurious goods is increasing. Questionably, where are the affluent tax payers? Notably, for over a decade our leadership, including successive Prime Ministers and Finance Ministers have been claiming that the economy is progressing fast; rather it is the only economy in the world to do so. Any wonder leading companies are attracted to the big market called India.

However, surprisingly, the number of direct tax payers is very low. According to the recently released data on tax payers and spending pattern by the Income Tax authorities, for the 2000-01 to 2014-15 period, only 18,359 individuals reported an income of Rs 1 crore or higher and paid tax on it in 2011-12.

Notwithstanding, the number of people visiting a high-end mall on a Saturday-Sunday in any city or “tier two” metro is at least four times more than the above mentioned figure. Besides, when compared to the consumption and spending data, particularly of luxury goods, confusion increases. As in any given year four luxury car manufacturers (like BMW, Mercedes-Benz etc.) sell over 25,645 units having an average price of Rs 40 lakh!

For argument’s sake, during the same year in India’s financial capital, Mumbai, 1,880 luxury flats were up for sale with a price tag of Rs 10 to Rs 100 crore. Who buys these cars and apartments? Are they part of the tax payer’s list?

Arguably, is India a nation of poor people or a country of the rich? The reality is confounding. See how various international manufacturers of luxury goods have opened shops in the country, be it wrist watches, hand bags, jewellery, designers’ apparels, furniture, motor bikes or ready to assemble kitchens. All seem to be doing profitable business and earning very well. In other words, they have a good patronage base of customers who are certainly not from the middle or lower middle class.

Interestingly, a survey by two private firms shows that there were over 81,000 ultra high net worth households in 2011-12. Taking into account that only families with a net worth of at least Rs 25 crore were considered for the survey, one can imagine that the number of households having a net worth of Rs 5 to Rs 24 crore would be quite large.

Do they all pay taxes? This is not all. The number of frequent flyers or those staying in luxury hotels in India or abroad is also in contradiction of the figures released by the income tax department.

Pertinently, according to a private firm’s estimate, India’s luxury goods market is valued at around $75 billion, which is huge, considering at least 26 per cent of India’s population lives in stark poverty. Of this, approximately $ 10 billion is spent on premium jewellery and around $ 3-4 billion on handbags, designers’ footwear and apparel along with other imported items like skincare.

Add to this, another $ 5-6 billion is spent on expensive homes (villas) and luxury furniture. Cars and motor bikes are other items to splurge on. There is no gainsaying there are many malls and super markets which sell super luxury brands and goods exclusively.

All world famous names like Armani, Gucci, Versace and their products, which cost a fortune, are available here. Obviously, such malls cannot operate if the number of super rich is below 20,000 only. So this begs a question: Why are patrons of these ultra expensive shops not in the list of tax payers?

Importantly, roughly five crore individuals file income tax returns every year and 28.7 million paid tax in 2011-12. But there were 814 million eligible voters in the 2014 Lok Sabha elections, so there was just one tax payer for 28 voters. Yet the luxury market is thriving in the country.

Further, in our country income from agriculture or farming is tax free. And, it is no secret that many people take advantage of this rule, which is one reason behind the poor tax collection. They declare income which is in excess of Rs 1 crore but as this is shown as ‘income from agriculture’ they do not have to pay any tax. It has also been observed that politicians or people close to them form a large portion of this ‘rich farmers’ group.

Paradoxically, many politicians do not ‘own’ any property but they sure do ‘control’ very big assets. Worse, no government takes any action on this front because of political reasons. Consequently, corruption is taking a heavy toll on the country’s economy. True, many government servants get arrested every year for having amassed huge amount of wealth and other assets, but still, several go scot-free.

Moreover, long term capital gains is also tax exempt in India, so more than Rs 70,000 crore annually remains tax free. Also, self-employed people, like traders or shop owners, hardly declare their true income and pay tax on it. What’s more, a majority of employment is in the unorganised sector and hence outside the tax net.

Furthermore, India’s direct tax to Gross Domestic Produce (GDP) ratio was 5.9 per cent in 2008-09 and decreased to 5.5 per cent in 2014-15; alongside the gross tax to GDP ratio has almost been stagnant around 10 per cent for many years.

Thus, to enhance revenue, the Central and State Governments increase indirect taxes like the service tax, VAT et al besides adding a cess on taxes. As a result, the salaried class has no alternative because their tax is deducted at source.

Unfortunately, the common man and poor people suffer the most in the process as they have to pay the same amount of tax as a rich person pays when they buy a small bottle of oil or a pack of tea leaves, yet there is a huge difference between their income levels.

On the obverse, industries enjoy ‘tax breaks’ under various rules. No matter, that the income tax department’s data also reveals economic inequality. In sum, every year during the Budget season there is big talk of augmenting the tax base, increasing the number of tax payers but nothing happens on the ground. There are hundreds of thousands who spend and splurge and yet big tax payers are missing and the Government of the world’s fourth largest economy looks helpless!

• Only 18,359 reported an income of Rs 1 cr or higher and paid tax on it in 2011-12
• A survey shows over 81,000 ultra high net worth households in 2011-12, each with a net worth of at least Rs 25 crore
• The number of households having a net worth of Rs 5 to Rs 24 crore would be quite large
• At least 26% of India’s population lives in stark poverty. Yet luxury goods market is valued at $75 billion
• Direct tax to GDP ratio was 5.9 per cent in 2008-09 and it decreased to 5.5 per cent in 2014-15
• Long-term capital gains is tax exempt in India, so over Rs 70,000 crore annually remains tax free.
• Self-employed people, like traders or shop owners, hardly declare their true income and pay tax on it.
• Income from agriculture is tax free. It is no secret many people take advantage of this rule
• Centre and States increase indirect taxes, besides adding a cess on taxes
• So, only talaried class, whose tax is deducted at source, bears the brunt

By Nikhil Gajendragadkar