57% vs 2%: The Stark Contrast in Taxpayer Populations Between Japan and India. It’s not that straightforward.

Why Only a Fraction of Indians Pay Taxes Compared to Japan. The answer is not so simple.

(Note: Both recent governments have improved the situation drastically. This article explores the historic view on this topic. Aim is to explore things beyond these numbers)

When we compare the tax-paying populations of India and Japan, the disparity is striking. In Japan, approximately 57% of the population pays income taxes, whereas in India, only about 1.5% to 2% of the population does so. This significant difference raises several questions about the economic structures, tax policies, and social dynamics in these two countries.

Japan: A Higher Proportion of Taxpayers

In Japan, the majority of the population contributes to the tax system. Here are some reasons why:

1. Income Levels and Tax Exemptions: Many individuals in Japan earn above the minimum threshold for paying income taxes. Even part-time workers and pensioners often find themselves within the taxable income brackets oaicitation:1,National Burden: Taxes and Social Security Contributions in Japan Exceed 40% of Income for Ninth Consecutive Year | Nippon.com oaicitation:2,Income Taxes In Japan And How They Are Paid – TankenJapan.com.
2. Social Security Contributions: Beyond income taxes, all residents are required to make social security contributions, which include health insurance and pension payments. These contributions are mandatory and widely enforced oai_citation:3,National Burden: Taxes and Social Security Contributions in Japan Exceed 40% of Income for Ninth Consecutive Year | Nippon.com.
3. Comprehensive Tax System: Japan has a well-developed tax system that captures a wide range of incomes and enforces compliance effectively. This includes taxes on salaries, business income, and capital gains oai_citation:4,Income Taxes In Japan And How They Are Paid – TankenJapan.com.

Non-Taxpayers in Japan

Despite the high proportion of taxpayers, a segment of the Japanese population does not pay income taxes for several reasons:

1. Low Income Levels: Individuals earning below the taxable income threshold are exempt from income taxes. This includes many part-time workers, students, and elderly citizens receiving minimal pensions.
2. Dependents: A substantial number of individuals are dependents, such as spouses and children, who are covered under the primary earner’s tax obligations.
3. Agricultural and Self-Employment Income: Some self-employed individuals, particularly in agriculture and small businesses, may underreport income or benefit from various tax deductions and exemptions oai_citation:5,Income Taxes In Japan And How They Are Paid – TankenJapan.com.
4. Subsidized Living: Many non-taxpayers receive government subsidies or social welfare benefits due to their low-income status.

India: A Different Economic Landscape

India, on the other hand, has a very different scenario:

1. High Exemption Thresholds: The income tax exemption limit in India is relatively high compared to the average income. As a result, a large portion of the population falls below the taxable income bracket oai_citation:6,Japanese taxes: Understanding the tax system in Japan | Expatica.
2. Agricultural Income Exemption: A significant segment of the Indian population is engaged in agriculture, which is exempt from income tax. This policy leaves many earners outside the tax net oai_citation:7,Japanese taxes: Understanding the tax system in Japan | Expatica.
3. Informal Sector Prevalence: The informal economy in India is vast, comprising small vendors, daily wage laborers, and others whose incomes are often unreported or underreported. This sector is largely untaxed due to its nature and the challenges in enforcement oai_citation:8,Japanese taxes: Understanding the tax system in Japan | Expatica.
4. Tax Evasion and Avoidance: There are also issues of tax evasion and avoidance, where individuals and businesses do not fully comply with tax regulations, further reducing the taxpayer base oai_citation:9,Japanese taxes: Understanding the tax system in Japan | Expatica.

Non-Taxpayers in India

In India, a significant portion of the population does not pay income taxes due to several factors:

1. Below Taxable Income: Many individuals earn less than the threshold required to pay income taxes, including agricultural workers, informal sector workers, and those in low-paying jobs oai_citation:10,Japanese taxes: Understanding the tax system in Japan | Expatica.
2. Agricultural Income: Farmers and individuals engaged in agricultural activities do not pay income tax on their earnings, which constitutes a large segment of the population.
3. Informal Economy: The informal sector employs a substantial number of people whose incomes are not formally reported or taxed. This includes small business owners, street vendors, and daily wage earners oai_citation:11,Japanese taxes: Understanding the tax system in Japan | Expatica.
4. Government Policies: Tax policies and enforcement mechanisms are less stringent, allowing for a degree of tax evasion and avoidance, which further reduces the number of people who pay taxes oai_citation:12,Japanese taxes: Understanding the tax system in Japan | Expatica.
5. Subsidies and Welfare: Similar to Japan, some non-taxpayers in India benefit from government subsidies and social welfare programs due to their low-income status.

What Do the Non-Taxpayers Do?

In both countries, those who do not pay income taxes still contribute to the economy in other ways:

1. Indirect Taxes: They pay indirect taxes such as Value Added Tax (VAT) or Goods and Services Tax (GST) on their purchases, contributing to the national revenue.
2. Social Contributions: In Japan, even those who do not pay income taxes contribute through social security payments. In India, similar contributions may come in the form of various indirect taxes oaicitation:13,National Burden: Taxes and Social Security Contributions in Japan Exceed 40% of Income for Ninth Consecutive Year | Nippon.comoaicitation:14,Income Taxes In Japan And How They Are Paid – TankenJapan.com.
3. Economic Participation: Both economies benefit from the participation of these individuals in the workforce, whether through formal employment or informal economic activities.

Conclusion

The contrast in taxpayer populations between India and Japan highlights significant differences in economic structures, tax policies, and enforcement mechanisms. Japan’s higher proportion of taxpayers is facilitated by a comprehensive tax system and mandatory social security contributions, while India’s lower figure is influenced by high tax exemption thresholds, a significant informal sector, and specific tax exemptions for agricultural income.

Understanding these dynamics is crucial for policymakers aiming to broaden the tax base and enhance revenue collection in both countries. For India, addressing the challenges of informal sector taxation and revisiting exemption policies might be key steps towards achieving a more inclusive and robust tax system. For Japan, maintaining the balance between taxation and social welfare will remain a priority as the population continues to age.

Sources:

• Nippon.com
• TankenJapan.com
• Indian Express
• The Economic Times