Share of Zero Returns in Individual and Corporate Income Tax Filings

A major concern in the income tax system is expanding its base — that is, bringing as many taxpayers as possible under the tax framework. A tax system with a larger base (i.e., more taxpayers) is considered more stable and serves as a stronger source of revenue.

Income tax return data indicates how many individuals or PAN holders have filed returns in a given financial year. The data also shows how taxpayers are distributed across different parameters, including the amount of tax paid.

By viewing these different data series, the relationship between the income tax system and taxpayers can be divided into three categories.

1. First category: Individuals who pay tax and file returns.
2. Second category: Those who pay tax but do not file returns.
3. Third category: Individuals who file zero returns, meaning they do not pay even a single rupee in tax.

The Indian income tax system has an extensive framework of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). These mechanisms were implemented to improve tax collection and ensure compliance when returns are filed. Their impact on revenue collection has been significant. The share of TDS in total revenue collection increased from 32% in 2013–14 to 41% in 2022–23.

In the case of firms, zero returns constitute only 28% of total returns filed — a relatively small share. In contrast, among individuals and companies, the proportion of zero returns is much higher.

The trends in the individual category are quite striking. On average, around 2 crore taxpayers pay income tax but do not file returns. This figure has not changed in recent years. Changes in compliance requirements may be a reason, as certain high-value transactions now make it mandatory to file returns.

However, these mandatory compliance provisions do not appear to have significantly increased tax payments.

For companies, due to demonetisation and the introduction of the Goods and Services Tax (GST), the number of returns showing tax paid has increased, and the number of zero returns has declined.

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