ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Evidence from Income Tax Data (2012–13)

‘Two Class’ Distribution of Income in India

Results from the 2012–13 income tax data reveal that Indian incomes, particularly high salaries and wealth-related income, are statistically distributed into two distinct classes. The bulk of the reported income distribution can be explained by an exponential distribution, while a small fraction at the top follows a more unequal power law (Pareto) distribution. This distinction has important implications for inequality, and provides a point of comparison with similar statistical regularities observed in rich countries.

Information on tax returns by individuals, families and businesses has recently been released by the Central Board of Direct Taxes (CBDT). Drawing on the data, this article studies the shape of the distribution of reported incomes by individuals in India during 2012–13. Since independence, there was a tradition of regularly producing these national statistics under the All India Income Tax Statistics (AIITS), but this practice stopped around 1999–2000. The recent data released, although limited to a single fiscal year, sheds substantial light on the concentration of income amongst top earners as well as wealth-related sources such as interest, property, business and capital gains. The granular breakdowns of income thresholds provide important information about the distribution of individual Indian incomes, consistent with historically observed statistical regularities.

The general trend amongst economists and statisticians interested in the distribution of income is to use survey data, in the case of India usually through the various rounds of the National Sample Survey. These survey data can then be used to compute inequality measures such as the Gini or Theil coefficients. However, surveys tend to be top coded or do not receive adequate responses from extremely high-earning members of the society. The emerging and recently popularised alternative is to use administrative data, such as reports of the Income Tax Department. These high quality data are cheaper to collect (compared to expensive surveys) since people are required to automatically report their incomes to tax authorities.

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Updated On : 15th Feb, 2017

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