Do Wealthy Indians Pay Enough Tax with Ram Singh
Insights on the taxation system in India and accounting practices of the wealthy
In this episode, journalist Puja Mehra speaks to economist and Director of the Delhi School of Economics, Ram Singh about why India's income tax base remains so narrow. Why do the richest Indians pay a smaller share of their income in taxes than the middle class? Drawing on his research, Ram Singh explains how India's tax system unintentionally favours the wealthy, and why income reporting becomes less honest as wealth increases. They talk about changes in compliance between 2014 and 2019, the role of GST, digital trails, and behavioural nudges like faster refunds in improving tax honesty. Should India introduce a wealth tax to plug the gap? Is the current tax structure fair? And what policy tweaks could make India’s tax regime more equitable without causing unintended harm? Tune in for insights on the disparity, psychology, and economics of taxation in India.
NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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TRANSCRIPT
Puja Mehra: Ram, thank you so much for joining the show.
Ram Singh: Sure, Puja. It's my pleasure to be on your famous show. I look forward to the conversation.
Puja Mehra: So you've written a research paper, you've been working on this for a long time, I know, on a topic that is of great interest to I think nearly all our listeners, which is taxation and if the wealthy pay enough tax. And before I get down to asking you to explain to us what your findings are, I thought we should start by understanding the difference between wealth and income because economists know that, but a lot of the lay listeners and students who listen to this show may not know the difference between income and wealth.
Ram Singh: Sure, it's a good starting point. We can start by discussing income. Income we define as earnings or money we receive for services we provide.
So income is broadly categorised in two groups. One we call labour income. Labour income, examples of labour income are wages, salaries people receive, commission and honoraria people receive.
So this form of income is a reward for the services provided by individuals. There is one more form of income that we call a capital income. For example, if we have fixed deposits in a bank, the bank pays us interest.
That income is interest income. For those who have invested in the stock market through mutual funds, then mutual funds pay a dividend. Or if you have directly invested in equity stocks, what you receive as a dividend payment is your equity income, is another form of capital income.
Wealth on the other hand, to compute wealth, we consider all the assets, hard and soft assets owned by people. For example, we will consider all your investments in the stock market, in bank deposits. We will also consider real estate that people own.
It could be residential, non-residential real estate. We also consider cars, watches, everything tangible, gold. Once we consider all these assets, we compute their market value as on today.
Market value of all the assets owned is what we describe as wealth. To make this distinction even sharper, if we take an example of fixed deposits in a bank and we earn interest from those fixed deposits, the fixed deposit amount is wealth, interest received is income. Similarly, investment in mutual funds is wealth, dividend received is income.
So hopefully now our audience will be clear about the difference between income and wealth.
Puja Mehra: And your main finding Ram, intuitively I think all of us, even those who don't follow income tax data etc., do suspect and believe that people who are wealthy and rich in India, the affluent, tend to pay less income tax than legitimately they should. Meaning to say that they are able to save on tax. But just how much this is, I think for me that was a real surprise from your paper.
I was expecting this but not as much. First, what are the key findings of your paper on the missing income tax?
Ram Singh: You are right about your observations on what people suspect. For me also the motivation was what I read in newspapers. So several years ago I read reports on who was the highest income taxpayer in India.
I followed these reports over several years and I noticed that the highest income taxpayers are people who are celebrities. For example, a movie star, a cricketer. These are people who are well off but if we ask the question who are wealthiest of Indians, these people, celebrities, movie stars, cricketers, they are not wealthiest of Indians.
So from media reports it was clear to me that people who pay the highest income tax are not the wealthiest of Indians and vice versa. And since income tax payment depends on income we report, therefore it follows that even from media reports it follows that people who are wealthiest of Indians do not report highest of income to income tax department. This observation raised my curiosity.
I pursued it as a research question and over the course of three years I put together a large amount of data using affidavits filed by people who can test the election. I used statistics published by income tax departments and Forbes list data. I put multiple data sources together to study the relationship between wealth and income people report to the income tax department.
As you remarked very rightly that it's not surprising that income wealth ratio, which is a ratio if we compare wealth with income people report, this ratio, income wealth ratio comes down with wealth, meaning thereby this ratio is high for people with very little wealth and it is very small for wealthy and super wealthy and ultra wealthy people. And the real surprise is not that it comes down, that this ratio comes down, the absolute levels are something that are striking. The absolute levels at, let's say if we look at figure income wealth ratio for top 1%, wealthiest 1%, this ratio comes out to be about 2%, which is to say that in top 1% wealthiest Indians report income that is equivalent to about 2% of their wealth.
If we consider even wealthier 0.1% wealthy Indians, this ratio dips down to 1%. If we consider Forbes listed ultra wealthy, then this ratio falls, even it falls to a level half a percentage point, meaning thereby reported income is equivalent to about half percentage point of their wealth. This is striking because if we go back to our example of fixed deposits, hypothetically speaking, if someone puts all their wealth as a fixed deposit, they will be earning at least 7-8% by way of interest income only.
So their income they should report should be about more than 7%, whereas actual figures are 2%, less than 2% as we discussed. So that's the real surprise here.
Puja Mehra: And Ram, how is it for people who are not affluent, for the lower ends of the spectrum of wealth, the not so affluent, how much are they reporting their income as?
Ram Singh: So their reported income of people, let's say bottom 10%, bottom 20% of the wealth pyramid, bottom 10-20% of the wealth pyramid, they report income which is more than 100% equivalent of their wealth. The real issue here is that the bottom of the pyramid owns very little by way of wealth. Their major source of wealth is the house they live in, which are tiny houses, small houses in rural areas, even in cities, small cities, tier 3, tier 4 cities is where they come from.
And the real estate value of the house, which is their main source, main form of wealth, is very small compared to income they earn. The women keep in mind that they do not earn a lot of income, but the value of their house is so small that even at minimum wage, their income is more than the value of their house. And as we move up the wealth pyramid, this ratio keeps on decreasing.
Income as a ratio of wealth keeps on decreasing.
Puja Mehra: So what does this tell us about, I mean, I know that we say that our income tax is a progressive tax, but are your findings supporting that? What are your findings telling us about how progressive or regressive the income tax system is?
Ram Singh: So yes and no Puja. So when we want to ask a question if our tax, income tax regime is progressive, we can take two views about, we can measure, we can assess the progressivity of the Indian income tax regime on two yardsticks. One is to compare tax liability with income.
For example, compare the tax I paid with my income, the tax you pay with your income. If yardstick is the income, accounting income, income people report, then Indian income tax regime is progressive, meaning thereby tax liability as a share of income increases. So people pay a larger and larger share of their income as they become income rich.
The other meaningful yardstick is, we compare my tax liability with my wealth and your tax you pay with wealth you own. If we take this yardstick, then our tax regime is not progressive. At the very top, it actually becomes regressive.
As we discussed a few minutes ago, the income people report at the top of the wealth pyramid, income people report is a small fraction of their wealth, and tax liability is only a fraction of income they report. So because the income wealth ratio falls with wealth, tax liability as a ratio of wealth also declines. It actually takes very small value, less than the value it takes at mid-wealth level, even at low-mid-wealth levels.
So if we take wealth as a reference point, then the Indian tax regime is not progressive. As we talk, there's one more idea that strikes my mind, which is to say that we could also consider the tax I pay with income I'm expected to be enjoying. The first yardstick was tax liability compared with income people report.
But we know that people do not report income truthfully. This is a problem in all tax jurisdictions. It is a serious problem in our jurisdiction also.
That's why the government, income tax department have been issuing notices, making a lot of noise about this issue. So it seems to me that if we compare tax liability with income, we expect different wealth groups to be enjoying it. On that count also, our tax regime does not seem to be progressive.
Because of what? Because of two factors. One is tax evasion and the other is tax avoidance.
Many wealth groups, actually most wealth groups, especially at the 50 percent of wealth pyramid, underreport income. They evade tax, which is an illegal activity. Top wealth groups, super wealthy, ultra wealthy, on the other hand, do not evade as much as they avoid, which is to say that they use loopholes in the tax regime to reduce their liability.
Puja Mehra: Ram, what are some ways in which the wealthy are able to use these loopholes to legitimately avoid paying tax or as much tax as it should ideally be paying?
Ram Singh: So one primary channel seems to be dividend income. Indian companies have the lowest dividend payout ratio. So what happens is that if you are invested in a company, your income is going to be capital income, which is the profit.
You are sharing the profit of the company. And we put tax on profits. This is corporate tax, which is tax on profits enjoyed by firms and companies.
Dividend tax is a tax on profit that gets distributed. For example, if I have a share in a company, my company has earned profit. If the company actually pays out that profit to me as a dividend, then I pay income tax on the dividend income I receive.
So this is dividend income taxes, tax over and above. It's a separate tax from corporate tax. So wealthy people keep dividend payments very low because if they pay out most of the profit and bring that profit into their individual accounts, they will be paying dividend tax.
Their tax liability will go up. But they can avoid this by suppressing dividend payout. Dividend payouts of Indian companies, if we look at top 500, top 200, top 100 private listed companies, their dividend payouts are less than 1%.
Turn out to be about 0.8%. So that suppresses their income. This is their income, their capital income, but it does not get transferred to their individual accounts and therefore they are able to avoid tax on this. As opposed to this, I find that professionals, several professionals like doctors and lawyers and some other professionals, engage in cash-based transactions.
So they outrightly avoid reporting the income and therefore they pay no tax at all. Since their income is combined, this income received by a lawyer, a doctor is combined, it's a mixed income. It has labour income and also capital income.
So this form of tax suppressing income reporting is actually illegal. It becomes illegal and is also another channel of under-reporting of income by wealthy groups. It also turns out that people who earn their income by way of labour, high wages, high salaries, commissions for highly accomplished professionals, and if they own agricultural land, then that also gets used.
Agricultural land is used to show taxable income as a tax-free income. So these are some of the leading channels used by people to under-report income and avoid and evade taxes.
Puja Mehra: And you're saying this not intuitively, you're saying this because your study of the simultaneous data sets from the affidavits filed in elections versus what is reported to the income tax department, you've actually compared the two to reach these conclusions, right?
Ram Singh: That's right, absolutely. I have hard data on the relationship between ownership of agricultural land and under-reporting of income on tax evasion. I have hard data on the relationship between profession and income people report.
I have hard data on equity and income people report. So I have very detailed nuanced data on wealth and also income reporting behaviour and also professions. I wanted to note that it's not that we cannot do anything about this situation.
There are things that have been done by the government and can be done to address this problem. So as a part of this study, I have compared income reporting behaviour for 2014 and also for 2019. So notice that between these two years, between 2014 and 2019, Benami Property Act was enacted.
Also, the income tax department issued several notices. The frequency of notices went up multiple times. Some search and seizure operation frequency also went up.
GST also came in during this period. As a result of all these measures, the income tax department was able to track more of the income.
Puja Mehra: Yes, and I think they also do it through the expenditure side because it's mandatory to report the PAN card number for various large big ticket spending items.
Ram Singh: That's right. And they also track credit card expenditures, foreign visits. So as a sum total of all these efforts, what I find is that people have reported their wealth more honestly, less dishonestly now than they used to in the past.
Even if I account for inflation increases in national income, I find that there's a significant improvement, statistically significant improvement on income reporting behaviour. So compliance with income tax law is better today than it used to be.
Puja Mehra: And I don't know if it's showing in your study, Ram, but I personally feel that I think another helpful factor probably is that the use of technology in the income tax system, for instance, for something like refunds, making income tax refunds has also introduced behavioural changes or the way taxpayers, I don't know if the affluent feel like that, but you know, the average taxpayer feels less hesitant to pay tax. Nobody likes to part with their money paid tax, but like, you know, this year I got my refund in less than one hour of filing my return.
And I think that is just such a wow factor that introduces, I tend to think that it would make a difference to people's behaviour.
Ram Singh: You are absolutely right. Actually, there is empirical evidence behind such interventions. If the income tax department becomes more responsive, that leads to better compliance with the tax laws.
So when we are sure that we will get a refund, then we don't mind, you know, paying a little extra to be on the safer side because we know that we will get our money back. Our money is not going to go in a black hole. Also, other gestures like, you know, they compliment you on timely payment of advanced taxes.
And these gestures also, it seems like they are making the difference. There are also things that the income tax department can do, which they are not doing at the moment. So one issue, ideally, if it were an ideal case scenario, then they should collect information, not only on income.
So when I file income tax returns, they should also ask me to report my wealth. But, you know, I'm not advocating that. There are logistical issues.
There can be political issues. But at least the location, you know, for example, if I report that I'm a doctor, I'm a lawyer, and this is address of my clinic or my office, if my office is located in a post colony, that should be used as a signal to say whether, you know, whether the income I report as a professional income, it's making sense or not. Because there's a positive correlation between your GPS coordinates and income you earn.
There is statistical evidence, empirical evidence for this. So this information is non-invasive. They ask for my address anyway.
Just asking this, whether the two seem to be okay, or they seem to be some abnormality. Using this kind of information, they can target the audits. They can choose, you know, who to audit, whose files to audit, and who seem to be doing okay.
Puja Mehra: And Ram, there is this feeling, quite generally people feel that the wealthy, Indian wealthy are undertaxed. Is that right? Is your analysis supporting that?
Ram Singh: Yes, except that I don't think it is a general feeling. Oh yes, it is general in the sense that lay Indians feel that they are undertaxed. But if you hear the narrative before every union budget, the narrative in media and TV channels, pink media, newspapers, is that Indian wealthy, corporate people who earn capital income, are overtaxed.
Puja Mehra: They're always asking for tax cuts.
Ram Singh: When they ask for cuts in corporate taxes and also cuts in income tax. So a feeling is generated as if Indian rich are being overtaxed. That is absolutely not the case.
If anything, average Indian, middle class Indian seem to be paying more by way of tax. You know, if you take into account income tax payment and also GST, indirect tax payments, super wealthy, rich Indians are not overtaxed. That I'm very sure.
Puja Mehra: You're saying this in absolute terms or in terms of the ratio to the wealth that you already explained?
Ram Singh: In relative terms, relative to their wealth. Also relative to their income, relative to their expected income. I want to, I think it's worth repeating, we have to make a distinction between income I report and income I actually enjoy.
So I'm saying that with reference to wealth and also with reference to income actually is enjoyed by rich and wealthy Indians. They are not overtaxed. In absolute terms, of course, they pay more tax than people who earn very little by way of income.
Puja Mehra: And one other debate that we recently saw is on the wealth tax. I don't know if there was genuinely a demand or not, but it was said that there is a demand for wealth tax and that that could solve all of India's taxation problems. What is your research showing on that?
Ram Singh: It's a complex issue. And I have seen many people get tempted to argue for wealth tax whenever we present findings like income tax ratio decreases with wealth, tax liability decreases with wealth. People think that a simple solution, even some of some leading researchers and policymakers are also tempted to argue and consider wealth tax.
I think it's not a good idea. There are two dimensions to it. One is that very few of us realise that we already have some features of wealth tax in our tax regime.
For example, property tax is a tax on firm property. This is a form of wealth. So to the extent we tax properties in urban areas, we are putting some tax on some forms of wealth.
Another good example of wealth tax is capital gains tax, short-term and long-term capital gains tax. These are also taxes put on changes in values of wealth, equity in this case. So we already have some features of wealth tax.
More than that, what people seem to be having in mind is that we compute the market value of all the assets owned by the wealthy and put tax on that value. That is going to be problematic for several reasons. There are going to be methodological issues here.
How to compute, what prices should be used to market value? Should it be book value or actual market value? If it is going to be market value, then market values fluctuate for wealth.
So it's implementation of the design of wealth tax that will be progressive, that will be easy to implement, is impossible. Moreover, our own experience and also the experience of many other countries has been disappointing. The countries that introduced wealth tax had to withdraw it, India included.
So I think our tax regime structure is fine, it's just that we can do more to improve the compliance along the lines we discussed. We can make property tax more progressive and have perhaps a more careful view about capital gains tax, which is desirable in my view. Yet another thing we can consider is what is known as estate tax, which is tax when someone transfers their wealth to their children or to other entities like trust and all, that time we can think of imposing some tax.
That would be more like capital gains tax. In normal times, as long as you remain invested, there's no tax, but when you redeem or transfer your wealth, that time you pay a fraction of your wealth, your gains as a tax. So that is something we can consider.
Puja Mehra: That also may be slightly difficult, no Ram? Because say somebody passes on a large bungalow to their children, now until the time you sell the bungalow, how are you going to pay that huge tax amount?
Ram Singh: So that is, yes, you are absolutely right. And that is a major issue when we think of wealth tax on property, wealth tax, core wealth tax. There can be people who, let's say, your seniors, who live in a house that is worth several crores, maybe 10, 20 crores, but their income could be very little, leaving them no ability to pay tax.
Similarly, if they transfer, if that's the only house, it's a residential house, and if they transfer it to the next generation, the next generation may not be in a position to pay the tax, that kind of house will. These are the complications associated with wealth. That's why I feel that it's not, we have to be very careful and not in favour of wealth tax for such reasons.
However, for equity, for instance, this is less of a problem. What we discussed is a problem for land, property. It is not a problem with respect to equity, because equity is, you know, in full and also partially, it can be monetised when the beneficiary wants to pay.
I cannot monetise a fraction of my house, but I can always monetise a fraction of equity that my parents might transfer to me. So that's something worth considering. But yeah, overall, no to wealth tax.
Everything considered.
Puja Mehra: Right. Thanks. Thanks, Ram.
Thanks for taking us through your very important research findings on a very important subject that everybody has an interest in.
Ram Singh: Thank you, Puja. It was a pleasure to interact with you. Thank you so much.
