How (high) Income Tax prevents Innovation

I recently researched how the Government of India (GOI) collects and spends tax revenue, particularly its impact on direct (income) tax payers. Despite efforts to boost GDP and position Bharat as a major manufacturing hub, the GOI has struggled to create stable high-income jobs or provide essential safety nets like reliable healthcare and quality education for taxpayers' children.

The contribution of income tax to overall tax collection is at an all-time high, yet a tiny fraction of the population (<1%) pays it. This means the GOI is heavily taxing the same small group, often taxing their income multiple times through various means.

This situation has significant long-term consequences. Without a safety net, healthcare, and educational support, income tax payers are less likely to pursue entrepreneurship. If the government provided these supports, many skilled individuals could start companies and add substantial value to the economy. Instead, they remain dependent on salaried jobs within the corporate cycle.

Many Western countries, like Norway and Germany, encourage income tax payers to start businesses by offering monetary incentives, free comprehensive healthcare, and quality education for their children.

The GOI must implement structural reforms to provide similar support. Returning a portion of direct income tax to taxpayers could spur creativity and productivity, fostering a more dynamic and innovative economy.

• 📊 Total Tax Collections Direct taxes (income tax) and indirect taxes (GST) are the main revenue sources.GST and personal income tax rose from 45% to 58.6% of total revenues (2017-2025).Tax revenue as a percentage of GDP remains flat at 11-12%.Tax revenues grew by 12.3% annually (2021-2025), up from 10.1% (2014-2020).
• 🏦 Income Tax Collections Personal income tax is crucial for funding welfare schemes. Post-COVID, personal income taxes exceed 50% of direct taxes.Personal income tax was 52% of direct taxes in 2023-24, up from 39% in 2015-16.Personal income tax collections are 3.6% of GDP in 2024-25.
• 🏗️ Capital Expenditure Capex has a multiplier effect on jobs and economic output. Post-COVID, capital expenditure tripled in five years.Public sector capex fell from 4.9% of GDP (2019-20) to 4.33% (2024-25).Public sector capex decreased by 0.7 percentage points as a share of GDP over 10 years.
• 📈 Dividends and Profits Dividends from central institutions contribute about 9% of revenue.Central bank to transfer ₹2.1 trillion in dividends for 2024-25.Year-on-year increase in dividends is 70% for 2024-25.₹56,260 crore in dividends budgeted from banks and PSUs.
• 💰 Goods and Services Tax (GST) GST replaced multiple taxes and created a common market.GST collections surpassed corporate tax revenues post-COVID.Weak personal consumption could hinder GST growth.Private consumption expenditure growth fell to 4% in 2023-24 from 6.8% a year earlier.
• 💵 Welfare Spending Addresses basic needs and boosts spending power of the poor.Average welfare spending increase was 13.5% per year (2019-2024).Welfare schemes as a share of GDP rose to 6.4% in 2023-24 from 5.3% in 2019-20.Welfare spending estimated at 6.1% of GDP in 2024-25.
• 🌾 MGNREGS Spending Provides rural employment with high demand post-COVID.Spending peaked at ₹1.11 trillion in 2020-21.2024-25 budgeted at ₹86,000 crore, 20% higher than 2019-20.Exceeded initial estimates in 9 out of 10 years of the BJP tenure.
• 📊 CessCentre collects cess without sharing it with states. Cess collections grew at 20% compounded rate over the last decade.Cess will make up 15% of taxes in 2024-25, up from 3.4% in 2014-15.States’ share would be 32% if cess was included in the tax kitty.
• 📋 Census and Other Data Delayed Census impacts welfare program design.Census office spent only ₹578 crore out of ₹1,565 crore allotted in 2023-24.₹2,726 crore spent on Census in 2010-11.66% of MPLADS allocation for 2023-24.
• 🚀 GDP Growth Essential for job creation and tax collection.GDP growth slowed for three years before COVID.2023-24 saw GDP growth above 8% for the first time in five years (excluding COVID years).Unemployment among 15-29 years was 16.5% in Dec 2023, down from 21.6% in June 2019.
• 💼 Fiscal Deficit Measures government spending beyond its means. Target was 3% of GDP by March 2021, but slow growth and COVID reversed progress.Projected debt-to-GDP ratio is 56% by March 2025, above the 40% target.
• 🏭 PSU Disinvestment Government aims to reduce its business involvement.Strong disinvestment agenda stated in 2014 but limited action post-2020.BSE PSU Index gave 11% annual return over 10 years, compared to 12.3% from BSE Sensex.
• 🧑💼 Government Jobs. Central government jobs are crucial for employment.Staff count shrank by 139,000 from March 2015 to March 2023.Employment gap of 8% between projected and actual numbers in March 2023.
• 🏥 Ayushman Bharat. Health cover to prevent poverty from medical expenses.79 million households enrolled as of Nov 2022, 73% of target. Hospital coverage uneven, with significant state differences.47.1% of health expenditure is out-of-pocket (2019-20).
• 🏠 Pradhan Mantri Awaas Yojana–Gramin (PMAY-G) Provides rural housing, boosts steel and cement demand, creates jobs.26.3 million houses built till March 2024, target increased by 20 million.₹3.7 trillion spent on PMAY-G over eight years.27% of PMAY-G houses are owned by women, double the previous estimate.
• 🚂 Capital Spend by Railways. Essential for railways' maintenance and expansion. Capex growth for 2024-25 was 1.9%, down from 2.8% the previous year.Railways capex as a share of GDP has been flat since 2022-23.Highest capex rate was 1.2% of GDP in 2020-21.
• 🏭 PLI SchemeAims to boost domestic manufacturing.₹1.97 trillion intended outlay, with ₹10,821 crore spent by 2023-24.Major expenditure in pharma and electronics/IT sectors.₹13,669 crore budgeted for 2024-25, an 81% increase over 2023-24.
• 🛡️ Defence Spending BJP's focus on defense requires high expenditure.Spending has remained at 1.4-1.6% of GDP since 2015-16.Projected spending of ₹4.8 trillion for 2024-25 is unchanged from 2023-24.Defence expenditure relative to GDP decreased by 0.1 percentage points in 2024-25.

Thanks to Mint for the stats and data.