Explainer: India’s income tax base narrow, expected to grow faster now

In recent years, the number of tax filers has grown at a fast pace, thanks to administrative steps and information sharing between the direct and indirect tax wings. Prasanta Sahu takes stock.

Explainer: India’s income tax base narrow, expected to grow faster now
About 15 million persons or 1% of the population or a quarter of those who file returns actually pay income taxes.

At the 75th year of Independence, India’s taxpayer base continues to be abysmally small and so does the direct tax-GDP ratio, at less than 6%. Just 1% of the population pays income tax. Also, the tax structure is such that the rich among individuals and firms find it easier to save tax, than their low-income counterparts. In recent years, the number of tax filers has grown at a fast pace, thanks to administrative steps and information sharing between the direct and indirect tax wings. Prasanta Sahu takes stock.

How many individuals pay income tax?

About 15 million persons or 1% of the population or a quarter of those who file returns actually pay income taxes. Individual income up to 5 lakh is exempt. However, if income exceeds this threshold, then taxes have to be paid on income in excess Rs 2.5 lakh.

How is the income profile as reported by individuals?

Nine individuals in the country reported the highest annual salary income of Rs 100-500 crore in assessment year (AY) 2019-20 and 35 had such income in the Rs 50-100 crore range. This was when salary income — the largest source among individual taxpayers — was shown as nil by 47% of the 55.3 million people who filed tax returns in that year.

How is annual information system (AIS) helping expand tax base?

AIS was rolled out in November 2021 to capture financial transactions of taxpayers beyond the TDS and TCS transactions. AIS is used by the tax department to pre-fill ITRs, which prompts taxpayers to report income correctly.

Why has effective corporate tax rate (ETR) declined in recent years?

The average effective tax rate for domestic companies was 22.54% in FY20, down from 29.49% in FY18, as statutory rates varied between 25.17% and 34.94%. Firms with profit before tax of over Rs 500 crore have average ETR of 20.19%, as many have shifted to the new 22% tax regime sans exemptions.

What is the revenue impact of tax incentives to corporates?

Major tax incentives for corporate taxpayers resulted in revenue foregone of about 1.03 trillion in FY21, up from Rs 0.86 trillion in FY17.

What about corporate tax assesees?

As many as 433 firms reported annual “returned income” (after statutory deductions) of above Rs 500 crore from all sources in AY21 while 1,410 showed the same in 100-500 crore range and 1,391 reported such income between Rs 50-100 crore. This was when 0.9 million firms filed returns.

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