Almost all finance ministers of India have faced the challenge of widening the country's tax net. While the debate over how few people pay income tax in India is old, what is less well-known is that many companies also avoid paying income tax. While only 2% of the population pays income taxes, nearly half of the companies that file income tax returns (ITRs) pay nothing at all.
How to widen the tax net remains a key question with no clear answer. Tax evasion, low wage growth, high unemployment, and high exemption limits mean that very few people qualify to pay income taxes. Additionally, accounting loopholes, low audit quality and income tax relief provided in 2019 have resulted in very few corporations actually paying income taxes. It's true that the number of tax returns filed by individuals has more than doubled, from 3.35 crore in 2013-14 to 7.54 crore in 2023-24. However, many of these are zero-tax returns, filed simply for compliance purposes. The number of individuals filing zero-income tax returns has more than doubled, from 1.69 crore to 4.73 crore during the same period. The result is that the number of individuals actually paying income taxes has grown at a slow pace between 2013-14 and 2023-24—from 1.66 crore to 2.81.
Rising Exemption Limits
The exemption limit has been raised successively since 2013-14. From Rs 2 lakh, it has gone up to effectively Rs 7 lakh by 2023-24. In 2013-14, as many as half of all returns filed were zero-tax. By 2023-24, that share went up to 63%. Among individuals who pay taxes, almost half (47%) report incomes of up to Rs 5 lakh; 37% earn between Rs. 5-10 lakh, 13% between Rs. 10-25 lakh, and only 1% report income above Rs. 50 lakh.
While hiking the exempt income tax slabs over the years may make political sense, it does not make economic sense, especially when 84% of the population earns less than Rs. 10 lakh per annum—India's per capita income is just around Rs. 2 lakh—and individuals earning up to Rs. 7 lakh are not required to pay income tax under the new tax regime. As many as 90% of eligible taxpayers in India pay anywhere from no tax to Rs. 1.5 lakh.
The top 1% of ITR filers pay 50% of the total personal income tax collection of India, while the top 9% pay 87% of the total tax, highlighting significant inequality and the challenges in widening the tax net. That's a huge burden on these top 10% of filers.
Corporate Filings
The situation among corporations is worse. Of the total 10.7 lakh corporate ITR filers, 57% report zero income, and another 33% earn between Rs. 0-50 lakh. In total, 90% of companies report earnings of just up to Rs. 50 lakh (corporations are taxed on profits, not income). Half (48%) of corporate filers pay zero income tax, while another 36% pay between Rs. 0-5 lakh in income tax. In terms of value, 84% of corporate filers contributed almost nothing to the total corporate tax collections of Rs. 7.16 lakh crore in the assessment year 2023-24. Again, the top 1% of corporate ITR filers pay 85% of total corporate income tax.
All this highlights significant inequality and raises questions about the financial health of companies in India. Another catch is that agricultural income is exempt from taxation—that is half of India's population. While that makes socio-economic sense, at least wealthier farmers could be brought under the tax ambit to provide a boost to tax collections.
Personal income tax, corporate tax, and GST collections account for one-third each of the total central government receipts. While tightening efforts to combat tax evasion by both individuals and businesses could bring in additional revenue, there is a limit to direct taxation as well. The government will need to focus on raising revenues through indirect taxes, while also considering the reintroduction of a wealth tax.
(Amitabh Tiwari is a political strategist and commentator. In his earlier avatar, he was a corporate and investment banker.)
Disclaimer: These are the personal opinions of the author
