India has long struggled with widening its tax net, with the debate over low income tax contributions being a recurring theme. However, a lesser-known fact is that even many companies are avoiding income tax. While only about 2% of the population pays income taxes, nearly half of the companies filing income tax returns (ITRs) end up paying nothing. This article delves into the reasons behind this phenomenon, including tax evasion, high exemption limits, and the role of corporate loopholes.
The Growth of Zero-Tax Returns
The number of individuals filing income tax returns has increased significantly over the years, from 3.35 crore in 2013-14 to 7.54 crore in 2023-24. However, many of these are zero-tax returns, filed for compliance. The number of such returns has more than doubled, growing from 1.69 crore to 4.73 crore. The number of people actually paying taxes has been growing slowly, from 1.66 crore to 2.81 crore between 2013-14 and 2023-24.
Rising Exemption Limits and Inequality
The increase in exemption limits has played a key role. From Rs 2 lakh in 2013-14, the exemption limit has grown to effectively Rs 7 lakh in 2023-24. By 2023-24, 63% of the returns filed were zero-tax. While this may have political appeal, it raises concerns about the economic logic behind it, especially given that 84% of the population earns less than Rs 10 lakh annually. The reality is that 90% of eligible taxpayers in India pay no more than Rs 1.5 lakh in taxes. This has resulted in a highly unequal tax system, where the top 1% of income tax filers contribute 50% of the total personal income tax.
Corporate Filings and Tax Evasion
The situation with corporate filings is even more alarming. Of the 10.7 lakh corporate ITR filers, 57% report zero income, while another 33% report earnings between Rs 0-50 lakh. In total, 90% of corporations report earnings of just up to Rs 50 lakh, contributing little to the overall corporate tax collection of Rs 7.16 lakh crore in 2023-24. Similar to personal income tax, the top 1% of corporate filers pay 85% of the total corporate tax.
The Issue with Agricultural Income Exemption
One major exemption is agricultural income, which is not taxed. While this makes sense from a socio-economic perspective, particularly for poorer farmers, wealthier farmers could be brought into the tax fold to boost overall tax collections.
Conclusion: A Complex Tax System
The tax situation in India underscores significant inequality, with a disproportionate burden placed on a small fraction of the population. While tightening efforts to combat tax evasion could help increase revenue, there is also a need for indirect taxation and possibly the reintroduction of a wealth tax. Addressing these issues could provide a more balanced and efficient tax system for the future.
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