How is it possible that only 3% of Indians pay income tax?

Answer by Balaji Viswanathan:

There is nothing shocking about the news item. What you need to do is parse the statistic that our news media is too lazy to do. Let's start from here:
Only 3.5 crore people, or 2.89 percent of the country's total population of more than 121 crore, file income tax return in India
Out of the 121 crore people might be your 1 year old son and a 95 year old grandma who might be earning no income. Neither need to file taxes. In fact, there are only 47 crore people who are actually working. India has a workforce of 47.41 crore: Government
Of these almost half are employed in agriculture. That is pretty much exempt from income tax. Our nation, like many others, have an idylistic attitude towards agriculture – a hangover from the agricultural past. We somehow assume that farmers are doing a more important job than rest of us.
In any case, that leaves only about 23 crore workers who work in factories and the service sector.
To pay income tax you need to be earning Rs. 2.5 lakhs or more per year. Because, we don't want to tax the poor. Now, how many of the workers do you see around you make Rs. 22000 or more per month? How about your maid? Not likely. How about the assistant sitting in the shop? Not likely.
This is a slightly old data, but what it shows is that the top 20% people even make far less than Rs. 2.5 lahs/year.
Of the 24 crore factory & sector workers, well less than 20% might actually be making Rs. 2.5 lakhs or more per year. That number is not far more than 3.5 crore people who are filing the taxes.
Learn to look beyond the screaming TV reporter. Visit outside of a major metro areas and see how many make Rs. 25k or more per month on salaries. That is not really a big percentage of the total population [that includes kids, students, unemployed, old aged, homemakers etc]. That percentage is unlikely to be more than 4%.
However, this is not a small number in aggregate. We have more income tax payers than say UK or Germany. And together they generate Rs. 3.5 lakh crores in revenue to the government [http://indiabudget.nic.in/ub2016… ]
This is the second biggest source of income to the Union Government [after corporate taxes] and pays way more than what the government spends on defense, education and health put together. It is no small amount.

How is it possible that only 3% of Indians pay income tax?

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