The income tax returns filed for the last financial year scaled a new peak on Monday. To be sure, the number of taxpayers has risen at a faster pace in recent years, reflecting higher compliance—from 28.7 million for FY13 to 74 million for FY22. However, the number of filers who claim nil tax liability also continues to rise—they were 56% for FY13, and 69% for FY22. According to the I-T department, the average time to process returns is now 16 days, much shorter than in earlier years. AI is being used to auto file returns—not just TDS data, but information on other incomes are captured automatically. Circumventing the taxman is more difficult now, but compliance is much easier.
Over the years, the government has been using technology, suasion, aggression and tact in judicious doses to widen the country’s income tax assessee base. The drive has been accompanied by moderation in tax rates (slabs restructuring), and greater ease of returns filing and processing, as well as quicker dispute resolution, and even a Taxpayers’ Charter. Exemptions and deductions are being removed progressively. The process of simplification of the personal income tax structure, culminated with the new tax regime (NTR), sans exemptions, which was introduced via Budget FY21.
If after all this, the country’s tax base is still much smaller than it should be, the reason is plainly the low and stagnant income of the average Indian. This is all the more evident from the relatively low growth in the number of I-T filers in the lower-income slabs, while the pools of those paying at the marginal rate and the super-rich are growing faster. With the more liberal recast of the slab limits, and the extension of standard deduction to those opting for NTR, there is now a virtual tax exemption for those earning up to Rs 7.27 lakh per annum. That is rather generous for India, given just 1.6% of the population actually paid income tax even during the assessment year 2022-23 (FY22). A big shift of the taxpayers to the NTR from the old regime that provides for exemptions, is believed to be taking place in the current financial year, especially among those who have higher incomes.
The government has been acting with the conviction that a benign and simple tax regime is the best bet for widening the taxpayer base and enhancing revenue productivity. In the process, it has even discarded the practice of using tax policy as an instrument to influence the savings and investment choices of people and companies, and refused to differentiate between asset classes, when it comes to taxing income. Curiously, the bold reorientation of tax policy is somewhat at variance with the overall strategy to spur investments, via production-linked incentives, cleaning up of banks’ balance sheets, deepening of the corporate bond markets, and an unprecedented push to public capex. The NTR may be promoting immediate consumption, rather than investments.
The tax department would do well to keep its vow of being unobtrusive, but ought also to focus its energies on zeroing in on the tax evaders at the higher end of the income spectrum. It must also desist from the misadventures that affects smoothness of compliance. The plan to levy TCS on spending via credit cards overseas, for instance, was one such. It had to be quickly withdrawn, as it went against the spirit of non-obtrusive tax policy.