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A recent study by Ram Singh, a member of the Reserve Bank of India's (RBI) Monetary Policy Committee and director of the Delhi School of Economics, has shed light on a concerning trend in India's wealth distribution and taxation system: the systematic underreporting of income by the country's wealthiest individuals and families. The paper, titled “Do the wealthy underreport their income?”, meticulously analyzes data from various sources, including affidavits filed by election contestants, the Forbes List of billionaires, and statistics published by the Indian Tax Department. The findings reveal a stark inverse relationship between wealth and reported income, suggesting that the wealthier an individual or family, the smaller the proportion of their actual wealth they declare for tax purposes. This underreporting, according to the study, not only leads to an underestimation of income inequality but also significantly reduces the tax liability of the wealthiest, resulting in a disproportionately low tax burden compared to their overall wealth.
The study's central argument is that the current tax system in India inadvertently favors the wealthy, allowing them to evade their fair share of contribution to the national treasury. The data presented paints a clear picture of this disparity. For instance, the total income reported by the bottom 10% of families is more than 188% of their wealth, indicating that they are declaring a substantial portion of their income relative to their limited assets. In stark contrast, the wealthiest 5% of families report incomes that constitute only 4% of their wealth, a significantly lower proportion. This discrepancy becomes even more pronounced when examining the income reported by individuals and families listed on the Forbes List of billionaires. The study reveals that the total income declared by these ultra-wealthy individuals is less than 0.6% of their wealth. This suggests that a vast majority of their capital returns, estimated to be more than 90%, do not appear in their reported incomes. “For the Forbes-listed 100 families, more than 90% of the capital returns do not figure in their reported incomes,” the paper states, underscoring the scale of income underreporting at the highest echelons of wealth.
The implications of this underreporting extend beyond the mere loss of tax revenue. It also perpetuates and exacerbates existing income inequalities within the country. When the wealthiest individuals and families underreport their income, they effectively reduce their tax liability to a fraction of what it should be. This allows them to accumulate even more wealth, further widening the gap between the rich and the poor. As the study points out, the underreporting of income “reduces the tax liability of the wealthiest percentile group to a mere 1% of their wealth. The tax liability of the wealthiest 0.1% and the Forbes-listed families is less than one-tenth of their capital income. Tax paid by these groups relative to their wealth is smaller than the relative tax liability for middle-wealth groups”. This suggests that the current tax system is regressive in nature, placing a heavier burden on middle-income groups while allowing the wealthiest to evade their fair share.
Furthermore, the study delves into the specific mechanisms and strategies employed by the wealthy to underreport their income. One common tactic is the underreporting of rental income, which is a significant source of revenue for many wealthy individuals. Additionally, some individuals misclassify taxable income as tax-free agricultural income in order to avoid paying taxes. This highlights the need for stricter enforcement and monitoring to prevent such fraudulent practices. The study also identifies certain demographic groups, such as women, politicians, full-time agriculturists, and individuals with criminal records, who tend to report significantly lower incomes. This suggests that there may be systemic issues and loopholes within the tax system that allow these groups to underreport their income without facing significant consequences.
Interestingly, the study also finds that individuals who are subject to higher levels of media attention and public scrutiny are more likely to report higher incomes. This suggests that visibility and accountability play a crucial role in influencing income disclosure practices. When individuals are aware that their financial activities are being closely monitored, they are less likely to engage in fraudulent activities such as income underreporting. This finding underscores the importance of transparency and public awareness in promoting tax compliance. The study's key findings can be summarized as follows: there is an inverse relationship between wealth and reported income; the bottom 10% of households report taxable income that is more than 170% of their total wealth, while the top 5% report taxable income that is less than 4% of their wealth; for the ten wealthiest families listed on the Forbes List, their reported taxable income is under 0.6% of their total wealth; the top 5% of individuals report only about one-third of the returns they earn from capital; the tax paid by the wealthiest 5% is less than a fifth of their capital income; rental incomes are frequently underreported; certain demographic groups tend to report significantly lower incomes; those who are subject to higher levels of media attention are more likely to report higher incomes; and the wealthier an individual is, the smaller their relative tax liability tends to be.
The implications of Singh's report are far-reaching and call for urgent attention from policymakers and tax authorities. The study highlights the need for comprehensive reforms to address the loopholes and systemic issues that allow the wealthy to underreport their income and evade taxes. This may involve stricter enforcement of tax laws, increased monitoring of financial transactions, and greater transparency in income disclosure practices. It is also essential to address the underlying causes of income inequality and create a more equitable distribution of wealth. This may involve policies aimed at promoting education, job creation, and access to opportunities for all segments of society. Furthermore, the study underscores the importance of public awareness and education in promoting tax compliance. By educating citizens about the importance of paying their fair share of taxes and the consequences of tax evasion, it may be possible to foster a greater sense of social responsibility and encourage more honest income disclosure practices. In conclusion, Ram Singh's study provides valuable insights into the complex issue of income underreporting by the wealthy in India. The findings highlight the need for urgent action to address this problem and create a more just and equitable tax system that benefits all citizens.