With an increase in taxpayer base, closing the tax gap

Source– The post is based on the article “With an increase in taxpayer base, closing the tax gap” published in “The Indian Express” on 16th September 2023.

Syllabus: GS3- Government budgeting

Relevance- Issues related to taxation

News– The article explains the changes in Indian tax policy landscape in recent years

Which significant developments have occurred in India’s tax policy landscape?

There has been adoption of the Goods and Services Tax and the introduction of faceless assessments.

The number of taxpayers has surged by 64% between 2014 and 2022, now totalling 93.7 million. This increase is notable across various taxpayer categories.

Over the past five years, more taxpayers have been submitting their returns. Various reasons drive this change. It includes the mandatory need for returns related to travel and loans, a growing inclination to claim deducted taxes, and the formalisation of the economy.

The number of tax returns indicating zero taxes has also risen. It has reached 66 percent in the fiscal year 2020-21.

Direct tax collections have outpaced both the average of the previous decade and the GDP growth in three of the last five years. A tax buoyancy factor of 2.52 indicates that there have been significant improvements in tax compliance.

What are the contributing factors towards the rise in direct taxes?

The rise in direct taxes can be attributed to the increased number of taxpayers and increased reported average incomes in tax returns.

In the fiscal year 2020-21, nearly a quarter of tax returns disclosed gross incomes falling within the range of Rs 5,50,000 to Rs 9,50,000.

This represents a notable shift from the 2015-16 period when one-third of gross incomes reported in returns fell within the Rs 2,50,000 to Rs 3,50,000 range.

What was the impact of Covid-19 on tax collections?

The effects extended across two fiscal years. Consequently, taxes paid on business incomes and overall tax collections experienced a decline between 2019 and 2021, despite the increase in gross incomes.

The impact of the economic slowdown was not evenly distributed among different income groups and categories. In the fiscal year 2019-20, the number of tax returns and reported incomes contracted for specific income brackets.