'Do the wealthy underreport their income?' MPC member's research reveals staggering details

New Delhi: Wealthier households in India tend to report significantly lower incomes relative to their wealth, according to a research paper by Ram Singh, a member of the Reserve Bank's monetary policy committee and director of the Delhi School of Economics.

A 1% increase in family wealth corresponds to more than a 0.6% decrease, on an average, in the reported income-wealth ratio, it said.

"The income-wealth ratios reported by the top wealth groups are minuscule compared to the rate of return on their assets," the paper said.

The Indian tax regime, too, is not progressive with reference to wealth, said the paper titled 'Do the Wealthy Underreport Their Income? Using General Election Filings to Study the Income-Wealth Relationship in India'.

The research analysis is based on election filings by the contestants for the Lok Sabha, the Forbes' list and income-tax data.

It found that tax avoidance plays a significant role in the low income-wealth ratios observed among the ultra-wealthy.

The paper also highlighted the influence of profession and gender. Women tend to report lower incomes than men, while full-time agriculturalists and politicians also disclose relatively low income levels.

"The bottom 10% of households reported income is almost double their wealth," it said.

The top 1% report incomes equal to just 3-4% of their wealth, and for the wealthiest 0.1%, the reported income falls below 2% of their wealth.

For the top ten wealthiest families, income reported is only about half a percent of their wealth, the paper said.

A similar pattern holds between individual wealth and reported income, as per the study.

Using national income data, it found that the reported income-wealth ratio for the wealthiest 20% is less than one-third of the national average.

The paper also said that the richer a taxpayer, the smaller the share of income tax paid relative to the wealth.

"For the wealthiest, the income-tax liability amounts to about 1% of their wealth. For the wealthiest 0.1% of individuals, the tax liability amounts to approximately 0.7% of the wealth," it said.

Further, the wealthiest 5% of individuals pay less than one-fifth of their capital income in taxes, and the top 0.1 percentile pay just about one-tenth.

The paper, however, suggested that tax avoidance may have positive outcomes as it could lead to increased investment by the wealthy, which in turn may boost employment and economic growth.