The case for an inequality boom in India is greatly exaggerated

Source: The post is based on the article “The case for an inequality boom in India is greatly exaggerated” published in Mint on 4^th April 2023.

Syllabus: GS 3 – Inclusive Growth

Relevance: arguments against rising inequality

News: Income-tax data has been placed before the Parliament. Data provides that inequality in India has increased due to the pandemic, GST, etc. The article provides a counter argument against it.

What are the views against increasing inequality?

First, Individuals whose taxable income is less than ₹2.5 lakh are not required to file tax returns, unless they need a refund of any tax which may have been deducted at source.

Thus, any changes observed in the pattern of the tax base in the ‘Under ₹5 lakh’ group cannot be used to measure the impact of the pandemic or other policies on the most vulnerable sections of Indian society.

Second, there has been a significant increase (13%) in the number of taxpayers in the lower-income group from 2016-17 to 2018-19. Another 11% increase was witnessed in 2018-19.

This increase was caused due to the use of GST data, a crackdown on black-money post demonetization and the adoption of sophisticated technology by the income tax department.

Therefore, if there would have been impact of GST and demonetization, the taxpayers would have decreased instead of increasing.

Recommendations of the 7th pay commission were also implemented in 2016-17. This caused increase in the number of government employees and pensioners in the overall taxpayer base.

Third, growth in the low-income group of taxpayers declined in 2019-20 and dropped further in 2020-21.

It is argued that decline was caused due to the demonetization and GST. However, it was more due to an economic slowdown caused by stress in non-banking finance companies in 2019-20.

Further, the drop of over 7% in the ‘Under ₹5 lakh’ category in 2019-20 could have also been due to some changes in the individual tax regime. 

For instance, A new provision of tax rebate of 100% tax for those earning below ₹5 lakh with standard deduction of ₹50,000 was introduced in 2018-19.

All these changes may have had a spillover effect in 2020-21.

Fourth, the decline in the number of taxpayers in the lower-income group in 2020-21 should not be seen in isolation, i.e., all the changes need not mean taxpayers fell below the taxable income threshold.

They may have shifted to the next slab of ₹5-10 lakh which saw a 20% growth to 3 million despite the pandemic.

Fifth, the Gini coefficient for Brazil falls when fiscal transfers such as health and education assistance are taken into consideration. Similarly, it also falls for the US when federal taxes and transfers are included.

Therefore, India’s social security net is vast and expanding. When the Gini coefficient for India is calculated, it is likely to yield a lower estimate of income inequality.

Must Read: Tackle The Four Trojan Horses Of Inequality

  Source: Mint