India’s Income Tax Compliance Improving: Taxpayer Numbers Grow 8% CAGR over 10 Years to 71 Million
India, the world’s most populous country, has seen a rise in income tax compliance, with the number of taxpayers increasing at a compound annual growth rate (CAGR) of 8% over the past decade, according to a study conducted global investment bank Jefferies Research. The total number of income tax filers in India has reached 71 million, which represents 6.3% of the adult population, a significant increase from the 31 million individuals who paid income taxes in FY12.
Despite the positive growth in income tax collections, it is worth noting that only a small fraction of India’s population actually pays taxes. Currently, 66.5 million individuals pay personal income tax, accounting for 4.8% of the total population and 6.3% of the adult population. Moreover, a study Jefferies reveals that only 33% of individual tax filers actually pay taxes due to higher rebate options.
The analysis also highlights the concentration of tax liability among the top 5% of income earners, who contribute a staggering 76% of the total personal tax collected. This group, which represents only 0.3% of adults, has remained consistently responsible for a significant portion of the country’s tax payments.
In terms of growth rates, individual income tax filers have outpaced corporate tax filers. While the number of individual income tax filers has grown at a CAGR of 8% to reach 68 million, corporate tax filers have experienced a slower CAGR of 5%, totaling 1 million in FY21. This divergence in growth rates, combined with corporate tax cuts, has led to a notable increase in the share of individuals in total direct taxes, rising from 33% in FY12 to 50% currently.
The study also sheds light on the sources of income for individuals in India. Salary income and business income make up the majority of total income, accounting for 47% and 45%, respectively. Salary income has seen a CAGR of 16% from FY12 to FY21, reaching Rs25 trillion, primarily driven an increase in the number of filers. Business income, on the other hand, has grown at a slower rate of 13%, amounting to Rs15 trillion. The average income for individuals declaring business income aligns with the non-taxable income limit, while salaried individuals have a higher average income due to the easier traceability of salaries through the Tax Deducted at Source (TDS) mechanism.
Another significant finding is the substantial increase in capital gains reported in FY21 returns. Capital gains, including both short-term and long-term gains, now account for 7.6% of total individual income, more than doubling year-on-year. Furthermore, the number of filers reporting capital gains has also doubled over the past three years, which can be attributed to improved disclosure and data tracking.
It is essential for India to continue its efforts to improve tax compliance and expand the income tax base, especially as the economy matures. The government has implemented various measures, such as demonetization, the introduction of the Goods and Services Tax (GST), and the usage of PAN cards for large transactions, to enhance tax disclosures. The ongoing formalization of the economy and the shift from agricultural to salaried employment are expected to contribute to the expansion of the income tax base in the long run.
Overall, the analysis conducted Jefferies Research provides valuable insights into the growth and composition of income tax in India. While compliance has improved, there is still a significant portion of the population that does not pay taxes. Continued efforts are required to ensure a more equitable and robust tax system in the country.