A recent research study has uncovered a massive disparity between the reported income and actual wealth of India’s super rich individuals. Titled “Do the Wealthy Underreport Their Income? Using General Election Filings to Study the Income–Wealth Relationship in India”, the study highlights how India’s ultra-rich significantly underreport their income and, as a result, contribute far less in income tax than expected.
Super Rich Indians Pay Far Less Tax Than Their Wealth Suggests
The research, conducted by Ram Singh, a member of the Reserve Bank of India’s Monetary Policy Committee and a professor at the Delhi School of Economics, provides striking evidence that many wealthy Indians are not reporting their true income levels. Using data from Lok Sabha election affidavits, Forbes’ rich list, and income tax records, the study finds that the wealthiest 0.1% of Indians pay just 0.7% of their wealth as income tax, while those on the Forbes list pay as little as 0.4%.
Declining Income-to-Wealth Ratios Among the Wealthy
One of the most alarming findings is that income-to-wealth ratios fall as wealth increases. While the bottom 10% of households report income that is almost double their wealth, the top 1% report income equal to only 3–4% of their wealth. For the top 0.1%, this drops to below 2%. This pattern implies a high level of tax avoidance among the ultra-wealthy.
The research notes:
“A 1% increase in family wealth corresponds to a more than 0.6% decrease in the reported income-wealth ratio.”
India’s Tax System Favors the Wealthy
The study also critiques the Indian tax system for being non-progressive with respect to wealth. While middle-income and lower-income groups report a relatively higher proportion of their income, wealthier taxpayers often exploit exemptions, leading to a regressive tax burden.
According to the paper:
“The wealthier a taxpayer, the smaller the income tax paid relative to their wealth.”
Average Politicians Are Far Richer Than Average Citizens
Another revealing insight from the research is the massive wealth gap between Indian politicians and regular citizens. In 2019, the average family wealth of Lok Sabha members stood at USD 998,311, compared to just USD 26,867 for the average Indian household. That’s a staggering 1:37 wealth ratio.
By contrast, the U.S. has a 1:4 gap, and China’s top politicians are wealthier still. The combined wealth of the 10 richest members of China’s National People’s Congress in 2018 was a jaw-dropping USD 132.3 billion, dwarfing their Indian counterparts.
Tax Evasion at All Levels, Especially Middle and Upper-Middle Classes
While the study focuses on the ultra-rich, it also finds significant tax evasion among middle and upper-middle-class groups. Many taxpayers misclassify taxable labor income as tax-free agricultural income and underreport rental income from agricultural land and commercial property.
“Tax evasion is especially acute at middle and above-average wealth levels due to the dominance of farmland and property in asset portfolios,” the paper states.
Could Income Underreporting Be Beneficial?
Interestingly, the study doesn’t entirely dismiss the possible positive economic impact of income underreporting. It suggests that by reducing tax liabilities, wealthy individuals retain more capital, which could lead to higher investments, job creation, and potentially accelerated economic growth.
“The wealthy groups’ income missing from tax returns reduces their tax liability, leaving more funds for investment, which may boost overall economic growth,” the study notes.
Key Takeaways:
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Ultra-wealthy Indians underreport income and pay disproportionately low taxes.
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India’s tax system is not wealth-progressive, favoring the richest.
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Politicians are far richer than the average citizen, creating a significant wealth gap.
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Tax evasion exists across all income groups, especially through misreporting property and agricultural incomes.
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Underreporting may stimulate economic activity, but it undermines tax equity.
Conclusion
This research underscores the urgent need for tax reform in India, especially to increase transparency and plug loopholes that allow the wealthy to escape their fair share of the tax burden. As India pushes toward becoming a $5 trillion economy, addressing this imbalance could significantly boost public revenue, enabling better infrastructure, education, and social welfare programs.
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