Context:

The mega Air India order marks the entry of India as the world’s most significant consumer. 

Demographic advantage:

• According to OECD, a quarter of our population is less than 15 years old which makes us a very youthful nation indeed. The steady upward trend in the working age population is noteworthy as it gives us a definitive edge over our peers and can help drive growth in the coming years.  

Why the low tax base?

• Effectively only 1.2 per cent of the population pays income tax as of now.
• The worker population ratio in India is 44.5 per cent.
• Further, a dominant portion of India’s workforce is employed in agriculture and agri income is exempt under income tax. 
• The tax incidence arises only if the income is above a certain threshold. This reduces potential income taxpayers.
• Given these factors, the current run-rate of IT return filing between 6.5 and 7.5 crore is not low. 

Possible Solution: 

• Drive towards formalization of the economy and identifying high income earners in the informal sector can perhaps help increase the number of income tax payers.

Increasing the tax base:

• A low-hanging fruit is the agricultural income and many have also been advising the government to bring it into the tax net. 
• According to a paper, ‘Measuring Informal Economy in India_ Indian experience’, by SV Ramana Murthy, besides agriculture, some sectors such as construction, trade, restaurants, communication and other services too have over three-fourth of the entities operating in the informal sector. Bringing such businesses in to the formal sector could help direct tax collections.
• Collecting tax at source for purchase of certain goods and services is another way to identify those who are not paying any taxes. While this could hit honest taxpayers, they can reclaim the tax in their annual return based on the form 26AS.

Way Forward:

• This is the time for India to take an edge by sustainably using its working population resource.

 News Source: The Hindu Business Line