Are India’s High Tax Policies Driving Talent Abroad?

The conversation relating to India’s taxpayers and increasing NRI Remittances has been hot in recent times. A recent observation brought forward that while 2.24 crore Indians as a whole paid ₹10.44 lakh crore as income tax in 2023-24, 2.45 crore NRIs have remitted remittances to India to the tune of ₹10.62 lakh crore. This raises questions on tax and economic policies in India and whether the government has a strong enough stimulus to encourage emigration.

Let’s break down the salient points of this debate, interpret its consequences, and predict how it will shape India’s economic future.

The Numbers That Matter

1. Income Tax Collection:
   • Indian taxpayers provided ₹10.44 lakh crore to the government’s kitty in FY24.
   • Y-o-Y growth in income tax collection was healthy at 25.2% yr, reflecting higher compliance and increasing incomes of taxable segments.
2. NRI Remittances:
   • In the same fiscal year, NRIs remitted ₹10.62 lakh crore to India, surpassing domestic income tax collections.
   • This 17.4% increase over YoY reflects increased earning potential and significant financial ties abroad among Indians while being very well attached to the motherland.
3. Population Disparity:
   • India’s population has grown significantly, yet the proportion of the population that pays income tax has scarcely increased.
   • This contrasts with the increase in the count of NRIs; since 2014, over 80 lakh Indians have gone abroad.

This raises questions on tax and economic policies in India and whether the government has a strong enough stimulus to encourage emigration.

NRIs vs. Resident Taxpayers: A Policy Dilemma

From a government’s perspective, the economic value of NRIs is now approaching, if not crossing, that of taxpayers resident in the country. The argument is simple:

1. Higher Earning Potential Abroad:
   • Compared to NRIs in India, those residing in developed nations earn 3-5 times more.
   • These earnings have remitted significant proportions into India’s foreign exchange reserves, which has helped stabilize the economy.
2. Limited Government Responsibility:
   • NRIs do not directly demand infrastructure, healthcare, or public services in India.
   • This lightens the government’s load compared to the resident taxpayer, who expects road development, better health care, and other vital amenities.
3. Growing NRI Population:
   • With around 3.5 crore NRIs and Persons of Indian Origin, it is estimated that as many as 70% remit money back to India.
   • However, with the Indians’ increasing migrations, the quantum of remittances will only increase, so the contribution of domestic income tax collections will be relatively much lower.

The “Questions” Taxpayers Ask

One more satirical yet pointed observation in this debate is that resident taxpayers often demand accountability for their contributions. Common grievances include:

Compared to NRIs in India, those residing in developed nations earn 3-5 times more.

• Infrastructure Issues: “Why are the roads still in poor condition?”
• Taxation on Essentials: “Why is there an 18% GST on health insurance?”
• Environmental Concerns: “Why is pollution worsening?”
• Law and Order: “What prevents the police force from becoming more effective?”

Such questions exemplify the frustrations of Indian taxpayers who do not see quality-of-life improvements as tangible investment returns. To the government, such demands would require more funds and accountability when handled, but remittances are strings-free.

Implications for India’s Economic Policy

1. Shifting Revenue Streams:
   • This would mean that remittances would grow faster than income tax collections. The government might rely more on this source of revenue.
   • Policies that facilitate smoother remittances, such as favourable exchange rates or reduced transfer fees, may take priority.
2. Incentivizing Migration:
   • This could indirectly increase the economy through increased remittances, though encouraging skilled workers to migrate is a counterintuitive policy.
   • It may also redefine India’s “brain drain” story as a “brain gain” story for economic growth.
3. Focus on Domestic Tax Base Expansion:
   • The stagnation of the tax-paying population hints at the urgent need for structural reforms to widen the tax base.
   • Reducing evasion, simplifying compliance and formalizing small businesses would also narrow this gap.
4. Strengthening Diaspora Bonds:
   • Initiatives like “Pravasi Bharatiya Divas” can foster stronger emotional and economic ties with NRIs.
   • Special schemes allowing NRIs to invest in Indian infrastructure or startups can help in win-win scenarios.

The NRI Perspective: An Investment in India

Remittances are not just money transfers to NRIs but investments in their homeland. Funds are often utilized for:

With around 3.5 crore NRIs and Persons of Indian Origin, it is estimated that as many as 70% remit money back to India.

• Support families and dependents.
• Invest in real estate, startups, or other ventures.
• Donate to charities or development initiatives.

This financial and emotional attachment means remittances are likely to remain high even when other nations face recessions. More importantly, the NRIs significantly contribute to India’s soft power by increasing this country’s economic and cultural wisdom and raising its standing internationally.

Future Trends and Projections

Based on current pace, here are some trends likely to define the next decade

1. Faster Growth in Remittances:
   • Remittances are expected to grow at YoY levels exceeding income tax collection, with drivers being a substantial diaspora population and better-paying jobs abroad.
2. Digital and Financial Integration:
   • It would also make remittances faster, cheaper, and more secure. Thus, NRIs would send a more significant amount of money to India.
3. Policy Shifts:
   • The government could introduce incentives, such as tax benefits or special investment schemes, to encourage the inflow of remittances from NRIs.
4. Declining Domestic Taxpayer Numbers:
   • Population stagnation may persist at levels of taxpayers and, hence, higher expansion of remittances and collections through income taxes if drastic changes do not emerge.
5. Diaspora-Focused Infrastructure Projects:
   • Remittances can be goaded into investment in long-term growth: Municipal bonds and state-sponsored schemes to re-route inflowing remittance incomes.

Such questions exemplify the frustrations of Indian taxpayers who do not see quality-of-life improvements as tangible investment returns.

The Road Ahead

India’s international workforce is paradoxical regarding tax and remittance dynamics. In general, it reflects the strength of the tax and remittance system in the Indian economy and the requirement for internal change. Thus, increasing reliance on NRIs would mean that the economy has reached a balance with sustainability while expanding the revenue base, boosting public services, and meeting taxpayer expectations.

This would unlock huge growth potential in NRIs’ connections with their feelings and money towards India. In this way, through the mutually beneficial relationships between its citizens and diaspora, India could find its way through inclusive and equitable growth.

In this regard, taxpayers and NRIs have irreversibly moulded the Indian economy. Balancing these contributions with systemic inefficiencies will make India prosperous over the long term.

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}