The Pathetic Number of Income Tax Returns Filed Should be Seriously Debated!

  • The Indian taxpayers know that the deadline to file their returns is 31st July every month for the previous financial year. Millions of honest taxpayers wish to not only file their returns diligently on time but also would not cut ways or circumvent paying their dues.  Conversely, the less said the better about those millions who not only desist from filing returns but also would find ways to dodge paying due taxes.  Unfortunately, the majority represent the second set of people rendering the first set a minority of honest taxpayers feel unfair.  They deserve to be sincerely applauded for contributing to the nation-building exercise, you see.

PC: Jun Aguirre

  • As you are aware, despite monumental efforts to extend the tax net to include more citizens, the number made available on record is rather poor for one’s comfort. Against this backdrop, it comes as no surprise to observe the Government of India’s social media posts mentioning that 6.7 million income tax returns had been filed till 11 pm on 31st July 2022, an hour before the deadline.  To put that number in context, there are 617 million individuals with a PAN, of whom 467 million have also linked it with their Aadhaar.  Paradoxically, the number of PAN allottees exceeds the size of the workforce.
  • On paper, India’s potential tax base seems unusually large. However, from the practical standpoint of revenue raised, it’s despairingly narrow. The moot point to ponder over here is what measures should be initiated to ensure the taxpayer umbrella is extended to cover all eligible for filing returns.  Let’s delve into the matter.  Mind you, on account of pandemic-induced distortions in the last two years, the five years between 2015 and 2020 are the best recent period to get a sense of trends in the tax base.  As per reports, only 20% of non-corporate assesses in 2015-16 had an income exceeding Rs 5 lakh.  Fiver years later, it had increased to 24%.

PC: India TV Business Desk

  • But the increase in the size of the base that represents the potential for meaningful tax collection was less than 1 percentage point in a year. In 2018-19, about half of the 58.7 million returns filed among all taxpayers showed no income.  Therefore, the slice of the potential tax base that yields revenue is tiny.  Looking at corporate tax assessments gives an even clearer picture of the narrowness of the base.  The budget showed a corporate tax base of 9.17 lakh firms in 2019-20.  Of this, a mere 0.2% or 1,843 companies contributed 69% of the corporate tax.  It’s no exaggeration to say that the budget’s performance is influenced by less than 2,000 firms.  A key reason for the narrow base is the tax exemption window, described by the budget as an indirect subsidy to preferred taxpayers.
  • A wide exemption window and high statutory rates have given India the worst of both worlds. Successive governments have moved towards narrowing the window of exemptions, but it’s not been fast enough. Note that India’s direct taxes contribute a little over 50% of the total tax revenue.  It needs to be more for an economy with a per capita income of around $3000.  The only way forward is to widen the tax base by embracing technology like Artificial Intelligence and an accompanying legal architecture.  Such measures should be introduced expeditiously.