Incongruent returns

In 2010, upon completing 150 years of collecting income tax, India celebrated its first Income Tax Day on July 24. Similarly, in 2023, the 162nd Income Tax Day was observed. On July 24, 1860, India witnessed its inaugural income tax collection. The year 1857 marked the first organised attempt by Indians to gain independence, causing substantial losses for the British rule, which were offset by the imposition of income tax.

Despite over seven decades having passed since the country gained independence, the number of income tax filers remains nominal. The number of income tax payers has only grown by 1.63 per cent over the past five years. Nevertheless, personal tax deposits have risen by 73 per cent. This accomplishment is attributed to technological advancements by the Income Tax Department. The implementation of technology ensures that both salaried and non-salaried individuals can no longer conceal interest income earned in banks.

Only 6.2 per cent of the less than 70 million taxpayers in India file income tax returns, and more than 5.5 per cent file zero tax returns. In contrast, around 60 per cent of the taxable population in the USA files income tax returns, while only 0.70 per cent of the taxable population in India pays income tax. In this country with a population of about 140 crores, the number of people who pay 30 per cent income tax is only 60.8 lakhs, that is, only so many people have an annual income of more than Rs 10 lakhs.

In India, 6.2 per cent of nearly 70 million individuals file income tax returns, while in the USA, 59.9 per cent do so. In Britain, the figure is 56 per cent, in France 58 per cent, and in China 9.8 per cent. Although the tax rate is significantly lower in India compared to developed countries, individuals here pay less tax. For instance, the tax rate is 54 per cent in Canada, 51.6 per cent in the USA, 49 per cent in France, 47 per cent in Italy, and 45 per cent in South Africa, China, Japan, and Germany. It stands at 40 per cent in the UK and 37 per cent in India.

In the financial year 2021-22, the number of taxpayers in the country paying more than Rs 1 lakh was 30,08,033. Taxpayers falling within the range of Rs 1 to 10 lakh constitute 27,93,463. Additionally, those paying income tax ranging from Rs 10 to Rs 50 lakh amount to 1,96,535, while individuals who paid tax between Rs 50 lakh and Rs 1 crore numbered 12,963. Lastly, those paying an income tax exceeding Rs 1 crore accounted for 5,072 individuals. As per the figures from the financial year 2021-22, individuals earning less than Rs 2.5 lakh constitute 57 per cent of the country's total, followed by those earning between Rs 2.5 to Rs 5 lakh at 18 per cent, and those earning Rs 5 to Rs 10 lakh at 17 per cent. Furthermore, earners in the range of Rs 10 to Rs 50 lakh comprise 7 per cent, while those surpassing 50 lakhs constitute 1 per cent.

Data available until August 2020 placed Uttar Pradesh at the forefront, contributing 18 per cent of income tax filers. Bihar stands at the second spot with a 10 per cent share, while Madhya Pradesh takes the third position with an 8 per cent share. Maharashtra and Rajasthan share the fourth position, both contributing 6 per cent. These statistics reveal that individuals from the BIMARU states show a more responsible approach towards depositing income tax compared to those from the developed states.

Salaried individuals in India carry the highest tax burden, whereas non-salaried individuals, including professionals like doctors, lawyers, chartered accountants, architects, and businessmen, have a comparatively lower tax liability. On average, non-salaried individuals in the country file an income tax return of Rs 31,500, while their salaried counterparts file returns exceeding Rs 90,000. Among non-salaried individuals, 96 per cent file income tax returns of less than Rs 10 lakh, whereas 88 per cent of salaried individuals file returns of less than Rs 5 lakh.

In our country, non-salaried individuals enjoy various exemptions in income tax, which results in reduced tax liability. Despite this, certain businessmen engage in tax evasion. Small businessmen with machinery in their factories benefit from a 0 per cent depreciation allowance on the machine's cost.

Several factors contribute to the low tax base, such as the informal economy prevalent in India. Another contributing factor is the limited participation of women in the workforce in India.

According to a World Bank report released in June 2022, the labour force participation of Indian women has steadily declined since 2005 and is projected to reach a low of 19 per cent in 2021. Additionally, a substantial portion of India's population relies on agriculture. As agricultural income is exempt from income tax, nearly 50 per cent of farmers do not file Income Tax Returns.

In both the old and new tax regimes, income tax is only required to be paid if one's income exceeds a certain threshold. Under the old tax system, individuals earning up to Rs 5 lakh are not required to pay any income tax. A significant portion of India's population falls within this income bracket and is thus exempt from income tax. Furthermore, those whose income is up to 5 lakhs also tend to abstain from filing income tax returns.

Clearly, incorporating informal businesses and workers into the tax framework will yield benefits for both the nation and the general populace. Hence, it is imperative to encourage businessmen to voluntarily register their enterprises with the government and adhere to tax regulations. The Goods and Services Tax (GST) system can play a pivotal role in achieving this objective. Consistent income tax deposits can lead to financial assistance from banks and grant access to government schemes. Through GST, the benefit of input tax credit can be availed, and significant buyers can derive advantages from continuous supply.

Identification of high earners can be facilitated through bank transactions, credit card records, property acquisitions, etc., thus effectively bringing them under the income tax ambit. While certain farmers possess incomes amounting to lakhs and crores of rupees, they often remain exempt from taxation. Broadening the tax net to include agricultural income can expand the tax base.

Applying tax collection at the source during the purchase of specific goods and services can aid in identifying potential taxpayers. Currently, Tax Collected at Source (TCS) is applicable to expensive motor vehicles, gold jewellery, overseas money transfers, etc. Nonetheless, this scope could be expanded to encompass consumer durables, domestic luxury travel, stays in upscale hotels, and similar transactions.

It is evident that our country's income tax system exhibits several anomalies. Salaried individuals dutifully pay taxes, yet some professionals and businessmen engage in tax evasion. Moreover, certain loopholes exist in the system. For instance, the government has struggled to collect taxes from businessmen operating within the informal sector. In addition, taxpayers who fulfil their tax obligations often find that the anticipated facilities are not forthcoming. Consequently, a sense of discontent prevails among them regarding the government's methods and systems.

Views expressed are personal