This represents a 4% increase in zero-tax Returns Filed in 2021-22 from the previous assessment year, despite the overall income of individuals and businesses growing by more than 14% in the tax returns filed in 2021-22, according to official data from the tax department.

While the overall trend of increased tax return filings signals a broadened tax base and improved compliance, the rise in returns claiming zero-tax liability raises concerns about the depth of this expansion.

Only 22.9 million tax returns showed any actual tax outgo in the assessment year 2021-22 for income earned in the previous year, a tiny share of India’s 1.4 billion population. A large number of those filing returns either claim no tax liability or receive their entire tax outgo refunded, reducing the number of those who actually contribute to the exchequer. To be sure, the number of tax return filers does not take into account people whose taxes have been deducted at source, for example, by employers, but are yet to file their tax returns.

Official data showed that the number of tax returns with no tax payable went up from 28.9 million in the assessment (return filing) year 2019-20 to 43 million in 2020-21 and then to 44.6 million in the assessment year 2021-22. That is despite the total reported income after various deductions and benefits have gone up from ₹51.72 trillion in the assessment year 2019-20 to ₹54.24 in 2020-21 tax returns and subsequently to ₹62.34 trillion in the returns filed in 2021-22. Also, only 1.4 million tax returns filed in 2021-22 show zero gross income, suggesting that the remaining in the class of no-tax liability have achieved that through tax deductions, incentives or by being below the basic exemption limit. In 2021-22 tax returns, the gap between gross income before tax benefits and the reported income offered to taxation is ₹7.25 trillion.

According to experts, the enhancement of tax benefits to the middle class, such as tax rebates and greater reporting requirements, have contributed to the increase in the number of tax returns without a tax outgo. Many people file tax returns with no-tax liability because of the requirement of the law, said Ved Jain, tax expert and former president of the Institute of Chartered Accountants of India (ICAI). When taxable income is nil, but income before exemptions and deductions is above the basic exemption threshold, one is required to file tax returns, explained Jain.

He said the benefit of a tax rebate of up to ₹7 lakh in the new tax regime, announced this year, is expected to add to the number of tax returns without a tax outgo.

The government is now encouraging individuals to move to the new tax regime with a lower tax rate and fewer exemptions to simplify the tax system, reduce disputes and make tax compliance easier. Also, for those taxpayers who do not fully utilise the current tax benefits under the old tax regime, a lower tax rate in the new regime is beneficial. The tax department has been steadily improving its use of technology, reporting requirements by third parties, and the scope of its taxes deducted at source, including on virtual digital assets, to ensure that income is not under-reported.

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Updated: 24 Oct 2023, 10:05 PM IST