In his Independence Day speech, Prime Minister Narendra Modi announced that his government has set a goal of making India a $5 trillion economy by 2024-25. Following PM Modi’s announcement, Uttar Pradesh Chief Minister Yogi Adityanath announced he too plans to make his state a $1 trillion economy.
Both the goals are ambitious, and if achieved will do wonders for the Indian economy.
But while these ambitious goals promise a prosperous future, in reality, the share of prosperity among Indian states is highly concentrated in a selected few. The Indian economy is grand but the gulf between incomes of individual states is glaringly wide.
In other words, most states are lagging while a few are racing ahead in revenue collection.
The latest data on tax collection released by the Central Board of Direct Taxes show that Maharashtra, Delhi and Karnataka alone contribute 61 per cent to the country’s total revenue from direct taxes.
If we include Tamil Nadu and Gujarat to this list, the share of the top five states rises to 72 per cent.
Direct taxes primarily include income taxes paid by individuals and corporate taxes paid by firms.
Greater revenue collection reflects greater income, both of individuals and corporate entities, which in turn means better employment opportunities and greater ease-of-doing-business in a state. Thus, one can say states which have higher revenue collections are generally also states which have greater avenues for economic activities.
Since 2008-09, direct taxes have consistently contributed more than 50% to the govt’s total tax revenues with the exception of 2016-17 when share of direct taxes was 49.65%.
Analysis of the country’s tax revenues for the past six years (2013-14 to 2018-19) shows that Maharashtra leads the tally in tax revenues. It has raised direct taxes of Rs 19,17,944.98 crore, and is followed by Delhi (Rs 6,93,275.11 crore) and Karnataka (Rs 4,99,310.99 crore).
Large and populous states like Uttar Pradesh, Bihar, West Bengal, Rajasthan and Madhya Pradesh fare poorly.
For example, Bihar–the third most populous state–contributed just 0.65 per cent to India’s direct tax revenue in the past six years, while its neighbours Uttar Pradesh–the most populous–and West Bengal–the fourth most populous– contributed just 3.12 per cent and 4 per cent respectively to total direct tax collection.
Poor collection of direct taxes in these heavily populated states reflects the absence of formal sector employment and corporates. It also shows that much of the working population in these states isn’t part of the salaried class because had it been the case, the revenue from income tax would not have been so low, given the large number of people inhabiting these states.
WHAT DOES THIS MEAN?
Revenue from direct taxes is an indicator of the strength of the formal sector (especially the service sector) and concentration of industries/coporates in a region. Higher the number of salaried employees in a region, higher will be the revenue generated from income tax.
In past six years, revenue from personal income tax was 40.24 per cent of the total revenue collected from direct taxes in India. This shows that personal income tax makes a sizable part of the government’s revenue from direct tax collection.
High direct tax revenue in Delhi, Maharashtra and Karnataka indicates that these three are hubs where corporate, employing a large section of India’s salaried class, are concentrated. A majority of these salaried people are generally migrants from other states, with Uttar Pradesh, Bihar and West Bengal being dominant contributors to the corporate workforce.
To buttress this point, let’s take the example of Chandigarh, a small Union territory, and compare it with Uttarakhand, a much larger state. Between 2013-14 and 2018-19, Chandigarh generated direct tax worth Rs 12,869.91 crore.
In past 6 years, revenue from personal income tax was 40.24% of the total revenue collected from direct taxes in India.
During the same period, Uttarakhand generated direct tax revenue to the tune of Rs 14,910.07 crore. This was just 0.15 per cent more than Chandigarh, which has emerged as a major service sector hub in North India and draws human capital from across the region.
Despite its very small size, Chandigarh is able to generate tax revenues commensurate to Uttarakhand or even Himachal Pradesh. This is made possible because the Union Territory has a large population of service class people and good concentration of corporates key sources of personal income tax and corporate tax.
HOW DO REGIONS FARE?
A region-wise division of direct tax contribution shows that the five southern states–Karnataka, Andhra Pradesh, Tamil Nadu, Telangana and Kerala–contribute 23 per cent to India’s direct tax revenues.
In comparison to this, north India (comprising J&K, Punjab, Haryana, Delhi, Uttarakhand, Himachal Pradesh and Uttar Pradesh) contributes 21.30 per cent to direct tax revenues. But this wealth isn’t uniformly shared as Delhi alone makes up 64.22 per cent of north India’s direct tax revenues.
Among all regions, west India (Maharashtra, Rajasthan, Gujarat and Goa) contributes the most, generating direct taxes worth 44.63 per cent of the national collection. But nearly 85 per cent of this comes from Maharashtra.
The disparity in prosperity among states becomes even glaring when we see figures for eastern states like Bihar, West Bengal, Odisha and Jharkhand which collectively contribute just 6.37 per cent to India’s direct tax revenue collection. Even if we add the numbers of the eight Northeastern states to this, the contribution rises to 7.12 per cent.
In the Northeast, much of the region has been declared Scheduled Areas which are exempt from income tax. However, the lack of industries and an almost non-existent service sector in the region means revenue collected from corporate tax is negligible.
DIRECT vs INDIRECT TAXES
The government’s revenues come from two sources: direct taxes and indirect taxes. The latter include taxes like the GST, excise duties etc.
Tax collection data for the past 19 years show that the share of direct taxes in the government’s total revenue has been increasing regularly.
In 2000-01, direct taxes contributed only 36.31 per cent to the total taxes and the remaining revenue came from indirect taxes. However, by 2018-19, the share of direct taxes had risen to 54.78 per cent.
Since 2008-09, direct taxes have consistently contributed more than 50 per cent to the government’s total earnings with the exception of 2016-17 when share of direct taxes was 49.65 per cent.
In the coming decade, India may herald itself into the league of $5 trillion economy but there are not enough signs emerging from the states that the glaring income disparity would be overcome by 2024-25, the deadline set by PM Modi to achieve the target. Thus, the task for PM Modi is not just to reach $5 trillion, but also to find ways that ensure economic prosperity is shared across the country.