Need to simplify tax brackets and broaden the net
The government has claimed that the tax burden on individuals earning less than Rs 20 lakh a year—that is, the middle class—has reduced over the past decade, while that on the rich—those earning more than Rs 50 lakh—has substantially increased. As per income tax data, the number of filers above Rs 50 lakh increased fivefold from 1.85 lakh in 2013-14 to 9.39 lakh in 2023-24, while their tax liability shot up 3.2 times from Rs 2.52 lakh crore to Rs 9.62 lakh crore. In other words, they contribute the lion’s share of about 76 per cent to the annual income tax kitty. On the other hand, the share of those earning less than Rs 10 lakh reduced from 10.17 per cent to 6.22 per cent and, after adjusting for inflation, it translates to an almost 60 per cent decline in tax liabilities over the decade.
If individuals earning above Rs 2 lakh had to pay income tax a decade ago, thanks to exemptions and deductions, all those earning up to Rs 7 lakh pay no income tax now. Their tax liability stood at an average of Rs 43,000 in 2023-24, which officials say is the lowest among the emerging economies. Owing to simplified tax return forms and strong anti-evasion norms, the number of individual income tax returns saw a 121 per cent jump in the past 10 years to 7.97 crore in 2023-24. Within this, individuals with taxable income of over Rs 1 crore jumped fivefold from 44,078 to 230,000, of which the salaried class accounts for about 52 per cent.
While the increase in tax filers and collections is heartening, there is still a need to simplify the Income Tax Act and further broaden the tax net. The government’s willingness to streamline the filing processes is visible, but it needs to step up and reduce the compliance burden and eliminate complexities of the filing process due to numerous exemptions, deductions and rebates. There is also a need to simplify the tax brackets and rates, and importantly, extend tax relief to the middle class, which will in turn help improve private consumption and domestic demand. Striking a balance between tax relief and revenue mobilisation is a continuous process. Given that substantive income tax reforms have remained elusive until now, the upcoming Union budget in 2025 would be a good place to start.