Incentivise to widen direct tax base as less than 6% of population filed ITRs in FY23

There is no doubt that India is the world’s largest democracy with 140 crore population, holding the distinction of being the fastest-growing major economy and making a giant leap to become the fifth largest economy by replacing the United Kingdom. Prime Minister Narendra Modi on Wednesday asserted that India will be the third largest economy in the world in his third term (2024-29). India, under the leadership of PM Modi has already embarked on a journey in the ‘Amrit Kaal’ to become a developed nation by 2047. Undoubtedly, Modi would achieve what he has guaranteed. But, as a nation, are we honestly doing enough to contribute to this journey? No. It is startling that only 7,40,09,046 people filed income-tax returns in 2022-23. Yes, only about 7.40 crore assesses the total 140 crore population!

According to official data presented in the Parliament, if only 5.3% of total inhabitants file ITRs, those who actually pay tax will be even less. It means that less than 5% of Indians are directly shouldering the burden of 140 crore fellow citizens in the nation-building exercise. Even if we take out roughly 75% of the population from tax liabilities factoring in children, elderly and the poor, the number of taxpayers should be ideally 35 crore. The present situation is not only deplorable but also unacceptable – firstly, on the principle of equity; and secondly, it does not gel with the PM’s vision of making India the third largest economy after the US and China by 2029.

One is certainly intrigued by this ITR data of the Union finance ministry that was tabled in the Lok Sabha on July 24, 2023. Rich and industrial states — Maharashtra and Gujarat – emerged as the top two states (in that order) in terms of number of people filing ITRs in 2022-23. (Returns filed in FY23 reflected the income in the previous fiscal year). While Maharashtra is credited with 1,13,91,610 (or about 1.14 crore) ITRs filed, Gujarat secured the number two position with just 74,50,672 (74 lakh). Surprisingly, Uttar Pradesh (UP) left other rich, prosperous and industrial states, to become number three with 71,65,746 (71.66 lakh) persons filing ITRs in FY23. Interestingly, despite the gross state domestic product (GSDP) of Tamil Nadu and Karnataka being more than UP, the total number of people filing ITRs in the two states was just 45.90 lakh and 42.58 lakh, respectively.

According to the data, barring Gujarat and Maharashtra, most of the economically well-off states lagged behind UP in terms of the total number of ITRs filed in FY23. For instance, the total number of ITRs filed for Telangana was 26,92,185 in FY23; Haryana 29,45,240; Kerala 19,73,551; Andhra Pradesh 21,65,161; Punjab 36,09,942; Rajasthan 48,48,031; Odisha 12,90,397; West Bengal 45,56,394; Madhya Pradesh 29,93,536; and Chhattisgarh 11,60,389. And, about 3.7 million (37,06,999 crore) people filed ITRs in the country’s capital (Delhi) in FY23.

The data is relevant because in states’ overall ranking, UP was below all these states, barring Delhi. The composite score of CareEdge Ratings’ first edition of ‘State Ranking 2023’ ranked UP 15th among the large states, placing it below Maharashtra, Gujarat, Tamil Nadu, Telangana, Karnataka, Haryana, Kerala, Andhra Pradesh, Punjab, Rajasthan, Odisha, West Bengal, Madhya Pradesh, and Chhattisgarh. According to CareEdge, an arm of CARE Ratings Ltd, it arrives at the overall rank of states by evaluating their performance across the seven pillars – economic (weightage 0.20), fiscal (0.15), financial inclusion (0.15), social (0.15), infrastructure (0.15), governance (0.10) and environment (0.10).

The comparative data show an interesting fact. People filing ITRs in prosperous Punjab (36 lakh) – a land of luxurious cars — are far less than UP (72 lakh). Similarly, India’s power centre and the residence of the rich – Delhi has only 37 lakh people filing ITRs in FY23.

Tax evasion is not just a financial crime, it is a crime against society. Besides revenue losses to the exchequer, it puts an excessive tax burden on a very small percentage of the population, who are honest taxpayers. It is a legacy issue because bureaucrats always choose the easy way. They hound only those who file ITRs and non-fillers have so far escaped the tax net because the task is tedious for these ‘babus’ and they are only driven by meeting the target. Imagine, 25% of the population is filing ITRs and most of them are paying income tax – this would not only make the country prosperous, but also distribute tax burden evenly among the assesses. As a result tax rates could be reduced substantially, meaning more disposable income in the hands of people to spend, leading to faster growth of the economy.

The government should resolve to reduce the tax rate by widening the tax net. It can be done without overreach, the need is to shun bureaucratic attitudes and approach the matter with a positive mindset. Instead of punitive actions and lengthy paperwork, the government may resort to incentives – for example, persons paying income-tax regularly for 25-30 years would be eligible for a life-long pension after a cut-off date. It could be called ‘Gratitude to Taxpayer’ or some other fancy name. The amount of the pension can be determined on the basis of individuals’ contributions. A small portion of income-tax revenue can be collected in an investment fund or EPFO could be given the task to manage this Gratitude Fund. This will incentivise many people to join the tax net. Bureaucrats and policymakers may think of various other innovative schemes to incentivise taxpayers.