Ram Singh, a member of the RBI’s Monetary Policy Committee and the director of the Delhi School of Economics, has released a paper titled “Do the wealthy underreport their income?” The paper, which is based on affidavits filed by election contestants, the Forbes List of billionaires, and the statistics published by the Indian Tax Department, says that the “wealthier the individual or the family, the lesser is reported income relative to wealth”. It added that the “missing” income leads to an underestimation of income inequality and reduces the tax liability. It also leads to the wealthiest paying less in taxes.
According to the study, the total income reported by the bottom 10% of families is more than 188% of their wealth, while the wealthiest 5% of families reported incomes that were just 4% of their wealth.
It further pointed out that the total income reported by the wealthiest families on Forbes’ list is less than 0.6% of their wealth, noting, “For the Forbes-listed 100 families, more than 90% of the capital returns do not figure in their reported incomes.”
“From another perspective, the total income reported by the wealthiest 0.1% of families is only about a fifth of the returns from their capital, and at least 80% of their capital income goes unreported in the income tax returns,” it said.
It also noted that 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”.
Key findings of the report:
1- There is an inverse relationship between wealth and reported income – the richer the household, the lower the ratio of reported income to wealth.
“On average, the total income reported by the bottom 10% of individuals is more than 120% of their wealth; for the wealthiest 5% of individuals, it is just about 3.7% of their wealth. For the top 0.1% of the most affluent, the total reported income is only about 2% of their wealth. The ultra-wealthy individuals on the FL report the lowest income — about 0.5% of their wealth,” the report said.
2- For the bottom 10% of households, the taxable income they report is more than 170% of their total wealth. In contrast, the top 5% report taxable income that is less than 4% of their wealth. This figure drops even further for the top 0.1%, where reported income is less than 2% of wealth.
3- For the ten wealthiest families listed on the Forbes List, their reported taxable income is under 0.6% of their total wealth. A similar trend is seen when considering total declared income, not just taxable income.
“For the bottom 10% of families, the total reported income amounts to more than 188% of the family wealth. In contrast, for the top 0.1%, this ratio drops to about 2%. For the top 100 families on the FL, the total reported income is less than 0.6% of family wealth,” it noted.
4- Top 5% of individuals report only about one-third of the returns they earn from capital. This underreporting becomes even more severe among the top 0.1%, who disclose just about one-fifth of their capital income. For the ultra-wealthy families listed on the Forbes List, more than 90% of their capital returns do not appear in their reported income.
Singh’s report stressed that “even after factoring in all types of declared income, their total reported income amounts to less than 20% of their capital income; at least 80% of returns from their capital go unreported”.
5- The tax paid by the wealthiest 5% is less than a fifth of their capital income. The average tax liability of the wealthiest 0.1% is just one-tenth of the returns from their capital. The super-wealthy Indians on the Forbes List is less than 5% of their capital income.
6- Rental incomes are frequently underreported, and some individuals misclassify taxable income as tax-free agricultural income to evade taxes.
7- Certain demographic groups, such as women, politicians, full-time agriculturists, and individuals with criminal records, tend to report significantly lower incomes.
8- Those who are subject to higher levels of media attention and public scrutiny are more likely to report higher incomes, suggesting that visibility and accountability influence income disclosure practices.
9- The study highlighted that the wealthier an individual is, the smaller their relative tax liability tends to be. “The tax liability of the top centile amounts to 1% of their wealth. For the top one-tenth of the top centile, the total tax liability amounts to less than 0.8% of their wealth. The super-wealthy Indians on the FL pay tax that is less than 0.2% of their wealth — much smaller than the tax liability for individuals at middle wealth levels.”