India's super rich are hiding their income, pay less tax than you think

An analysis based on Lok Sabha election candidates' affidavits, the Forbes' rich list and income-tax data shows that the rich in India report significantly lower incomes relative to their wealth. The research by Ram Singh, a member of the RBI's Monetary Policy Committee which sets interest rates and director of the Delhi School of Economics, shows that a significant fraction of the affluent groups’ capital income does not find its way to the income tax data.

The research shows that the richer a taxpayer, the smaller the share of income tax paid relative to the wealth. "For the wealthiest, the income-tax liability amounts to about 1% of their wealth. For the wealthiest 0.1% of individuals, the tax liability amounts to approximately 0.7% of the wealth," it said.

The research argues that the income-wealth ratios reported by the top wealth groups are minuscule compared to the rate of return on their assets. A 1% increase in family wealth corresponds to more than a 0.6% decrease, on an average, in the reported income-wealth ratio, it says.

The research paper titled 'Do theWealthy Underreport Their Income? Using General Election Filings to Study the Income–Wealth Relationship in India' says tax avoidance plays a significant role in the low income-wealth ratios observed among the ultra-wealthy. The Indian tax regime is not progressive with reference to wealth, it says.

The study says we people exposed to media and civil society scrutiny have a stronger incentive to report their incomes truthfully.

Reported income goes down as wealth goes up

As per the research, the bottom 10% of households reported income is almost double their wealth. However, the top 1% report incomes equal to just 3-4% of their wealth, and for the wealthiest 0.1%, the reported income falls below 2% of their wealth.

"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 be decreasing in wealth. Yet, the income-wealth ratios reported by wealthy Indians seem to be inexplicably low."

The wealthier a taxpayer, the smaller the income tax paid relative to wealth

The estimates in the research paper suggest that the tax paid by the wealthiest 5% of individuals amounts to less than one-fifth of their capital income, and the tax liability of the wealthiest 0.1 percentile is just about one-tenth of their capital income. Super-wealthy Indians on the Forbes List pay tax amounting to a mere 5% of their capital income. The tax rules render the tax regime even more regressive with respect to wealth.

"We show that at top wealth levels, the wealthier a taxpayer, the smaller the income tax paid relative to wealth. For the wealthiest centile, the income tax liability amounts to about 1% of their wealth. For the wealthiest 0.1% of individuals, the tax liability amounts to approximately 0.7% of the wealth. Super-wealthy Indians in the FL [Forbes List] face income tax liability amounting to just 0.4% of their wealth. The relative tax liability of the ultra-wealthy groups is lower than that of the middle-wealth groups, even after considering the various exemptions granted to the latter under the tax law," says the research.

The average politician is wealthier than an average citizen

The research shows that the average politician is wealthier than the average Indian. The elected politicians are even wealthier.

"In 2019, the average family wealth of Lok Sabha members was USD 998,311, whereas the average Indian household wealth (as per NSSO 77th round) was just USD 26,867. Of course, the wealth differences between politicians and non-politicians vary across countries. For instance, the gap between the family wealth of the average politician vis-à-vis the general population is 1 to 4 in the case of the US. It is 1 to 37 in India, and possibly even higher for China," it says.

"Comparing elected politicians in our dataset with their counterparts in other countries also paints a picture of sharp contrast. Though much wealthier than their compatriots, even the most opulent among Indian politicians are no match for their American and Chinese counterparts. In 2019, the ten most affluent members of the Lok Sabha had a total wealth of USD 0.3 billion. In contrast, according to Open Secrets, in 2018, the combined wealth of the ten wealthiest members of the House of Representatives was USD 1.2 billion. The combined wealth of the wealthiest ten members of China’s National People’s Congress (NPC) in 2018 was USD 132.3 billion, much higher than that of Indian and American counterparts," it says.

Tax evasion acuter at middle and above-average wealth levels

The study highlights that the relatively high income reported by the middle and low-wealth groups does not mean that these groups report all returns from their capital. "... 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 labor 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," the study says.

Under-reporting by super rich can be good for the economy

Making an interesting observation, the study says that under-reporting of income leads to tax evasion but might have a positive impact in other counts.

"While interpreting our findings, it is important to keep in mind that the wealthy groups’ income missing from tax returns reduces their tax liability, leaving more income in their hands or company accounts. This, in turn, can lead to higher investments, resulting in higher employment and growth rates for the entire economy," the study says.