It is not just the income tax law which is subjected to diverse and creative interpretations. Everything related to income tax seems to fall in this category. Recently, in response to a question in Parliament, the government released statistics regarding income tax return filing in the last four years.

During the last four years, the number of income tax filers has increased from 6.47 crore in 2019-20 to 7.40 crore in 2022-23. At the same time, zero-tax filers increased from 2.90 crore to 5.16 crore in 2022-23 ( that is, the zero-tax filers were 45 per cent of total filers in 2019-20, which increased to 70 per cent in 2022-23).

While some cheered the growth in income tax filers, others saw an abnormal increase in zero income tax filers. An example is the article, ‘Number of Income Tax filers down 60% since FY20’ (businessline, August 12; https://bit.ly/3KMqouo).

Any data analytics without understanding the background, context and underlying facts would only lead to skewed interpretations and meet the natural peril of wrong conclusions.

First, to understand the above statistics, one must understand the recent changes in India’s personal income tax regime, which may have caused the rise in zero-tax filers. These changes were intended to widen the tax base (to bring more people into the tax base) and bring about ease of compliance for the taxpayers and enhance the citizens’ trust in the income tax system.

The three most important changes during the last four years, which require mention here, are the introduction of a new income tax rebate scheme for those earning income up to ₹5 lakh, the implementation of a new income tax regime with fewer exemptions/deductions and wider slab rates and the implementation of annual information system/taxpayer information system.

In addition to these three, there were benefits like the deduction for interest paid on loans taken for affordable housing and electric vehicles, exemption for medical reimbursement for treatment of Covid, and exemption of ₹1 lakh for long-term capital gains, which were also introduced during this period.

To understand the conundrum of zero-tax filers, let us further analyse the intent and impact of the income tax rebate scheme under section 87A of the Income Tax Act. This rebate is intended to provide a targeted tax benefit to the lower-income group. However, it must be stressed here that this benefit would be available to a taxpayer only upon filing a return of income.

Let us take, for example, a taxpayer who earns ₹7 lakh as income from various sources. After deducting eligible deductions, say of ₹2.5 lakh (such as housing loan, deduction for investments in section 80C, etc.), his taxable income is ₹4.5 lakh. Tax liability under normal circumstances would be ₹10,000 (5 per cent of ₹2 lakh after deducting threshold exemption of ₹2.5 lakh). This taxpayer would be entitled to a full rebate of ₹10,000 under section 87A, and his tax liability would be zero.

In this case, the taxpayer has income above the basic exemption limit of ₹2.5 lakh, but due to the income tax rebate, he has no tax liability. This provision was introduced in 2019-20, and many taxpayers benefited from it, whereby their tax liability would have become virtually zero. However, they would have continued to file tax returns. Recently in Budget 2023, this limit of ₹5 lakh has been increased to ₹7 lakh for those opting for the new tax regime. Thus, more taxpayers in the lower income group would have zero tax.

Second, the number of tax filers should not be looked at in isolation. Income tax revenue has shown a very satisfying trend in the last four years. Overall income tax revenue has grown from ₹10.5 trillion in 2019-20 to ₹16.5 trillion in 2022-23. Personal income tax alone has grown from ₹4.9 trillion in 2019-20 to ₹8.15 trillion in 2022-23. The PIT-to-GDP ratio has increased from 2.52 per cent to 3.07 per cent during the same period. This increase is despite the fact that there has been an increase in the percentage of zero-tax filers.

This is significant at two levels — on the one hand, increased tax revenue has come from higher-income earners. On the other hand, lower income earners have been provided income tax relief, resulting in an increase of zero-tax filers. No one can grudge this, as this is the ideal way to widen the tax base without putting a burden of tax liability on the lower income earners.

A game changer

Third, the approach adopted by the income tax department is one of nudge to make citizens voluntarily come forward and comply with the income tax return requirements. In this direction, the implementation of the annual information system/taxpayer information system (AIS/TIS) has been a game changer. Taxpayers have been provided with the benefit of pre-filled tax return schedules for most of their income, thus inducing them to come forward to comply with the filing requirement.

Lastly, one must not confuse “zero income filers” with “zero income tax filers”. While there may not be much use in bringing the former into the tax base, the latter needs to be counted as part of the tax base, even if there may not be much contribution in terms of tax revenue presently. However, being part of the tax base benefits taxpayers and policymakers. It is also an important step in the direction of achieving greater formalisation of the economy.

For the policymakers, it allows them to size the potential tax base, provide targeted benefits in the form of tax reliefs and non-tax schemes, verify the accuracy of third-party data, etc. One immediate tax policy change that was brought about based on data is to increase the threshold of rebate under section 87A from ₹5 lakh to ₹7 lakh (or effectively ₹7.23 lakh) in the recent budget. There is another use case worth highlighting for the tax administration from this data, of income disclosed by zero-tax filers. Income disclosed by such taxpayers would be an expenditure of another taxpayer. This information would allow the income tax department to cross-verify whether the zero-tax filer has disclosed commensurate income in his income tax return.

Finally, being part of the tax base allows taxpayers access to many other non-tax benefits such as financial assistance/loans and government schemes and, above all, makes them feel part of the country’s development — ‘jan bhagidari.

Anantha Nageswaran is the Chief Economic Advisor to the Government of India, and Balasubramanian is Joint Secretary, Tax Policy Research Unit, Ministry of Finance. Views are personal

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