In recent years, India has made significant strides in reforming its personal income tax structure, aiming to achieve two primary objectives: broadening the tax base and simplifying tax compliance for its citizens. These reforms include the introduction of a new income tax rebate scheme, adjustments to existing exemption and deduction policies, and the establishment of more comprehensive slab rates.
The number of income tax filers in India has seen a remarkable increase, rising from 6.47 crore in 2019-20 to 7.40 crore by 2022-23. During this period, the percentage of zero-tax filers has surged from 45% to an astounding 70%. This dramatic rise has ignited conversations regarding the growing number of individuals who do not incur any tax liability.
The underlying motivation for these reforms is twofold. Firstly, they are designed to encourage a broader segment of the population to participate in the tax-paying community, thus fostering greater trust in the taxation system. Secondly, these changes aim to provide relief to individuals with lower incomes while simplifying the process of meeting tax obligations.
One of the key features of the new regime is the income tax rebate outlined in section 87A of the Income Tax Act. This rebate is targeted at providing benefits specifically to those in lower-income brackets, ensuring that it becomes accessible to taxpayers who comply with their income tax return obligations.
To clarify how this works, consider a taxpayer earning ₹7 lakh annually. By detailing their eligible deductions and tax liability calculations, we can see how the rebate under section 87A can significantly reduce their tax liability.
Despite the increase in zero-tax filers, India's income tax revenue has continued to rise. From ₹10.5 trillion in 2019-20, revenues climbed to ₹16.5 trillion by 2022-23, reflecting a positive trend in the PIT-to-GDP ratio.
Inclusion in the tax base presents numerous advantages for both taxpayers and policymakers. These benefits include enabling better assessment of potential tax revenue, facilitating targeted provisions for benefits, ensuring data accuracy, and encouraging the development of a more formalized economy.
The income tax department has adopted a proactive strategy to promote voluntary compliance with tax return requirements. Initiatives such as the annual information system/taxpayer information system (AIS/TIS) play a crucial role in motivating taxpayers to comply.
In summary, this article highlights the significant increase in zero-tax filers within India's income tax framework and the transformative reforms aimed at enhancing compliance and trust in the system. It also underlines the benefits of being part of the tax base and the critical importance of accurate data interpretation before drawing any conclusions.
Total Income: The taxpayer earns a total income of ₹7 lakh from various sources, including salary and investments.
Deductions: Eligible deductions amounting to ₹2.5 lakh apply here. These could be for expenses such as a housing loan or investments under section 80C of the Income Tax Act, which help reduce the overall taxable income.
Taxable Income: After deducting eligible expenses (₹2.5 lakh) from the total income (₹7 lakh), the taxable income stands at ₹4.5 lakh.
Tax Slab and Calculation: With a taxable income of ₹4.5 lakh, the taxpayer falls within the initial tax slab. This slab covers earnings up to ₹2.5 lakh, which are tax-exempt. The remaining ₹2 lakh (₹4.5 lakh - ₹2.5 lakh) is taxed at a 5% rate.
Tax Liability Calculation: Based on the taxable income of ₹4.5 lakh, the tax liability is calculated at 5% of ₹2 lakh, resulting in ₹10,000.
Rebate under Section 87A: The taxpayer qualifies for a rebate under section 87A, providing relief to lower-income individuals. Since the total taxable income is ₹4.5 lakh, below the ₹5 lakh threshold, they receive a complete rebate of ₹10,000, effectively nullifying their tax liability.
Thus, the taxpayer's total income, eligible deductions, and the rebate application lead to a situation of zero tax liability. This rebate is particularly beneficial for lower-income individuals, aiding in reducing or entirely eliminating their tax burden and promoting a fair taxation system.
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