Editorial. Tax truths – The Hindu BusinessLine

Recently released data on direct tax collections trends over two decades do have some important lessons to offer. For one, there has been a notable improvement in the tax base on account of a number of factors, for which the income tax authorities must be given some credit. The tax base has expanded from 5.26 crore in AY14 to 10.41 crore in AY24, a growth of 98 per cent in a decade or a CAGR of about 7 per cent. The rise in digital footprint as well as a raft of confidence-building measures — such as consolidated and transparent income statements, pre-filling of returns for individuals, speedy refunds, among others — have aided bonafide taxpayers. The gains of compliance exceed the risks of flying below the radar in a digital age.

However, the growth of the population and workforce would per se have boosted taxpayer numbers. There is also no getting away from the strange fact that just about 7 per cent of the population pays taxes in the world’s fastest growing economy. There are at least three categories of income earners who can be tapped to improve the base: agriculturists, small and medium enterprises, and expatriates. Incomes from farming above a threshold can be tapped; small farmers covered under schemes such as PM Kisan Sannidhi Yojana can be excluded. There are any number of digital touchpoints now, besides land records, even in the case of rural transactions to arrive at a database. It is simpler to do so in the case of small enterprises, as the GST network can work as a rich data base for income tax authorities. A presumptive taxation model can be tried here. It is not known whether expatriates are paying their share of taxes on the Indian component of their salary, which falls outside the ambit of any double taxation avoidance treaty.

There are many interesting facets to India’s direct tax experience. A tax buoyancy of 2.12 in FY24 marks the only seventh year since FY2001 when the ratio has exceeded two. What’s more, direct taxes as a percentage of total taxes has risen from 36.3 per cent in FY2001 to 56.72 per cent today, a progressive shift by any yardstick, as there can be no two views about indirect taxes pinching the poor. But what is less equitable is that the buoyancy has been led by individual income tax payers rather than corporation taxes.

This reversal occurred abruptly in FY20, coinciding with tax concessions to corporates, and has stayed that way since then. For FY25 till October, net direct tax collections have risen 18.35 per cent, with personal income tax surging ahead. Within the personal income tax space, the number of individuals filing returns has grown at a slower pace between FY20 and FY23, implying that the tax growth has probably been led by a smaller section of individuals. Individuals surely deserve a better deal, after reposing faith in tax reforms introduced over the last decade or more.