Govt data on direct taxes points to ways of expanding the tax net

Have more Indians come under the income-tax net over the last few years? The latest data from the finance ministry’s income-tax department provides an answer to this question and points too many other interesting trends. It also adds a perspective to the direction and effectiveness of the Union government’s income-tax collection efforts since the formation of the Modi government in May 2014.

Of course, the answer to the question raised above is categorically in the affirmative. In 2013-14, the last year of the Manmohan Singh government, an estimated 30.5 million individuals filed their tax returns. Nine years later, in 2022-23, that number rose to 69.7 million – an increase of 128 per cent or a compound annual growth rate (CAGR) of close to 10 per cent. Not bad at all.

Even the personal income-tax collections grew from h2.38 trillion to h8.08 trillion in the same period – notching up an increase of 239 per cent or a CAGR of over 14 per cent.

What can explain the difference between the rate of growth in the filing of tax returns and in the payment of income tax by individuals? The detailed numbers released by the income tax department cover only the period up to the financial year 2021-22. According to this, over 89 million individuals paid income tax in 2021-22, compared to 53.8 mcagrillion in 2013-14. But the number of individuals who filed tax returns was only 65.46 million in 2021-22 and 30.5 million in 2013-14.

Clearly, the number of taxpayers is substantially higher than the number of individuals filing their tax returns. The difference is as much as 23.54 million in 2021-22 and 23.3 million in 2013-14. In between, the gap had widened to as high a level as 29 million in 2017-18 but it stabilised at a lower level in subsequent years. Officials explain that taxpayers are persons who have been subjected to tax deduction at source or TDS but have not filed the return of income. This would imply that over 23-29 million individuals have been paying taxes every year in the last few years through TDS but are not filing tax returns.

Two questions arise. One, has the government lost a huge opportunity in the last nine years in persuading well over 20 million taxpayers to file their returns and widen the tax base on a sustainable basis? Remember that TDS accounted for about 45 per cent of the total direct tax collections in 2021-22. This share was lower at about 39 per cent in 2013-14. Even as TDS collections are rising, the growing number of individuals paying taxes through TDS but not filing returns is certainly a lost opportunity. Collecting more tax through TDS is cost-effective for the government. But that cannot be the reason for not converting those who are subjected to TDS into filers of regular tax returns. The second question is: If indeed over 20 million taxpayers are not filing returns, what steps could the income tax department initiate to convert them into return filers?

A noticeable change in the composition of direct taxes also cannot be missed in these numbers. In 2013-14, personal income-tax, at h2.43 trillion, was less than two-thirds of corporation tax collections at h8.08 trillion is almost the same as the corporation tax collection of h8.25 trillion.

The most striking take away from the latest tax data pertains to the number of individual taxpayers in the country, whose gross annual income is over h1 crore. In 2020-21 (for which the latest data is available), this number rose to 132,497 – a CAGR of over 15 per cent in these seven years.