Surge in Zero-Tax Income Tax Returns: A Closer Look at India's Tax Landscape

Introduction

India witnessed a record number of Income Tax Return (ITR) filings in FY23, reaching an impressive 74 million. Surprisingly, a significant portion of these filings, 70% to be precise, were zero-tax ITRs, indicating that taxpayers claimed nil tax liability. The finance ministry released this data in Parliament, shedding light on the increasing trend of zero-tax ITRs. Over the last four years, the number of zero-tax ITR filers has surged by 77%, totaling 51.2 million in FY23.

Reasons Behind the Growth of Zero-Tax ITRs

While the total number of ITR filings has risen by 14% in the past four years, the substantial increase in zero-tax ITRs poses an interesting observation. The highest number of zero-tax ITRs were filed in Maharashtra, with 74.45 lakh taxpayers claiming no tax liability in FY23. Gujarat and Uttar Pradesh followed closely, with 59.92 lakh and 52.73 lakh zero-tax returns, respectively.

These zero-tax returns do not necessarily indicate tax evasion. Instead, they often result from individuals seeking tax refunds on deductions made during various transactions. Additionally, many taxpayers file ITRs to fulfill compliance requirements, even if they have no tax liability.

Finance Minister Nirmala Sitharaman highlighted that over 7.40 crore entities, including individuals, filed income tax returns in the fiscal year 2022-23, a 6.18% increase from the previous year. Of these, a staggering 5.16 crore declared zero tax liability. A similar trend was observed in the preceding fiscal years, with over 5.05 crore, 4.84 crore, 2.90 crore taxpayers claiming zero tax liability in FY22, FY21, and FY20, respectively.

Government Initiatives to Boost Taxpayer Base

The Indian government has taken several steps to expand the taxpayer base and streamline the tax filing process. These initiatives include:

1. Expansion of TDS/TCS: The scope of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) has been broadened to cover a wider range of transactions, ensuring greater tax compliance.
2. Simplification of Personal I-T: The income tax filing process for individuals has been simplified, encouraging more people to file returns accurately.
3. Prefiling of ITRs: The introduction of prefilled ITRs helps taxpayers by pre-populating their income details, reducing the burden of manual data entry.
4. Updated Form 26AS: The government introduced a revamped Form 26AS, providing comprehensive information on taxpayers' financial transactions, enabling better compliance monitoring.
5. Non-Filers Monitoring System: A system is in place to monitor non-filers closely, encouraging them to file ITRs and comply with tax regulations.
6. Awareness Campaigns: The tax department undertakes publicity campaigns, sending reminders via emails and SMS to taxpayers, to promote timely filing of ITRs and tax payment.

Conclusion

The surge in zero-tax ITRs reflects a combination of factors, including taxpayers claiming tax refunds and meeting compliance requirements. The Indian government's efforts to streamline tax filing and raise awareness have contributed to an increasing taxpayer base. As the country continues to grow economically, a broader taxpayer base will play a pivotal role in sustaining and strengthening India's fiscal landscape.

The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.