Tax Base Growth: Zero Tax Payers Impact

  Aug 28, 2023

The Tax Base Expansion and the Zero Tax Payers

Introduction of New Income Tax Regime: Over the past four years, India has undertaken reforms in its personal income tax structure to achieve two key goals: broaden the tax base and simplify tax compliance for taxpayers. These reforms involve the implementation of a new income tax rebate scheme, adjustments to exemption and deduction policies, and the introduction of wider slab rates.
Increase in Zero-Tax Filers: The number of income tax filers has risen from 6.47 crore in 2019-20 to 7.40 crore in 2022-23. Simultaneously, the proportion of zero-tax filers has notably increased, surging from constituting 45% of total filers in 2019-20 to 70% in 2022-23. This has sparked discussions surrounding the substantial rise in individuals who bear no tax liability.
Intent Behind Tax Reforms: The motivation behind these tax reforms is twofold. Firstly, it aims to encourage a larger segment of individuals to become part of the tax-paying community, thereby fostering trust in the taxation system. Secondly, these reforms seek to provide relief to individuals with lower incomes while simplifying the process of complying with tax obligations.
Income Tax Rebate under Section 87A: The text delves into the income tax rebate program outlined in section 87A of the Income Tax Act. This rebate is designed to extend targeted benefits to the lower-income strata. Emphasizing that this rebate becomes accessible when taxpayers fulfill their income tax return obligations.
Illustrative Example: The text offers an illustrative scenario involving a taxpayer earning ₹7 lakh, detailing their eligible deductions, tax liability calculation, and the application of the rebate under section 87A. This example underscores how the rebate can lead to a reduction in tax liability.
Positive Trends in Tax Revenue: Despite the surge in zero-tax filers, India's income tax revenue showcases an upward trajectory. Revenue has escalated from ₹10.5 trillion in 2019-20 to ₹16.5 trillion in 2022-23, accompanied by an increase in the PIT-to-GDP ratio.
Benefits of Being in the Tax Base: Being encompassed within the tax base brings numerous advantages for both taxpayers and policymakers. This encompasses assessing potential tax revenue, targeted benefit provisions, data accuracy verification, and the facilitation of a more formalized economy.
Tax Department's Approach: The income tax department adopts a strategic approach focused on encouraging voluntary compliance with tax return requirements. The implementation of initiatives such as the annual information system/taxpayer information system (AIS/TIS) plays a pivotal role in motivating compliance.
In summary, this discourse examines the augmentation in zero-tax filers within India's income tax framework, the transformative reforms in the income tax regime aimed at boosting compliance and trust, the benefits arising from being part of the tax base, and the crucial importance of interpreting data accurately before drawing any conclusions.

Example of a Zero Tax Payer Even with High Income:

Total Income: The taxpayer earns a total income of ₹7 lakh from multiple sources, including salary and investments.
Deductions: Eligible deductions totaling ₹2.5 lakh are applicable. These deductions could encompass expenditures such as a housing loan or investments under section 80C of the Income Tax Act. Deductions serve to reduce the overall taxable income.
Taxable Income: Following the deduction of eligible expenses (₹2.5 lakh) from the total income (₹7 lakh), the taxable income of the taxpayer amounts to ₹4.5 lakh.
Tax Slab and Calculation: The taxpayer's taxable income of ₹4.5 lakh falls within the initial tax slab. This initial slab encompasses earnings up to ₹2.5 lakh, which are exempt from taxation. The remaining ₹2 lakh (₹4.5 lakh - ₹2.5 lakh) is subject to a tax rate of 5%.
Tax Liability Calculation: The taxpayer's taxable income of ₹4.5 lakh corresponds to the 5% tax bracket. Consequently, the calculated tax liability stands at 5% of ₹2 lakh, resulting in ₹10,000.
Rebate under Section 87A: The taxpayer qualifies for a rebate under section 87A of the Income Tax Act. This rebate extends relief to individuals with lower income levels. In this instance, since the taxpayer's total taxable income is ₹4.5 lakh, which remains below the threshold of ₹5 lakh, they are eligible for a complete rebate of ₹10,000. This rebate effectively nullifies their tax liability.
In summary, the taxpayer's total income, eligible deductions, and the application of the rebate under section 87A culminate in a zero tax liability. This rebate benefits individuals with lower incomes by aiding them in lessening or entirely eliminating their tax burden, thereby promoting equitable taxation.


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