Why Only 6.6% of Indians File Income Tax Returns

Multiple Factors Contribute to Low Tax Compliance

December 20, 2024

In a parliamentary session, Finance Minister of State, Pankaj Chaudhary, revealed that only 6.68% of the country’s population filed income tax returns (ITRs) for the fiscal year 2023-24. There are multiple factors contributing to the low rate of income tax return filings in India.

While there has been a gradual increase in the number of filings—from 64.8 million in FY20 to over 80.9 million in the current fiscal—this figure still represents a mere fraction of India’s vast population. Chaudhary shared that nearly 49 million individuals reported zero taxable income in their ITRs for the assessment year 2023-24, a significant rise from the previous year’s 46.4 million.

The low rate of income tax return filings can be partly attributed to the massive informal economy, which includes small-scale businesses, agricultural workers and daily wage labourers. According to the World Bank, the informal sector accounts for around 80% of India’s GDP and employs around 90% of the country’s workforce.

These informal jobs often lack proper documentation, and many individuals either earn below the taxable threshold or prefer cash transactions to avoid taxation. Informal employment not only contributes to low tax compliance but also perpetuates economic disparities. Many workers in the informal sector lack access to financial services, education about tax obligations and the necessary documentation required for filing tax returns.

Another reason is the prevalence of low income levels among a large segment of the population. Many individuals earn incomes that fall below the minimum threshold required for tax filing, rendering it unnecessary for them to file returns. For the fiscal year 2023-24, the basic exemption limit for individual taxpayers below 60 years of age is set at 250,000 rupees per annum, which is equivalent to a monthly income of about 20,850 rupees.

Further, a considerable number of people rely on subsistence farming or low-wage jobs, where incomes are insufficient to warrant taxation.

One more significant barrier is the lack of awareness and understanding regarding tax obligations and the benefits of filing tax returns. This is particularly pronounced in rural areas. The tax system is complex, and therefore the procedures involved in filing taxes can be perceived as daunting, especially for those who are self-employed or have multiple sources of income. Gathering the necessary documentation, such as Form 16, bank statements and investment proofs, can also be challenging for many individuals.

Furthermore, limited access to financial services poses an additional obstacle to tax compliance. In remote areas, banking penetration is low, and the digital divide means that many people do not have the internet access or digital literacy required to engage with the increasingly digitised tax filing processes. Frequent changes in tax laws and policies also create confusion and deter compliance, as individuals struggle to keep up with the latest requirements.

Moreover, perceived corruption or inefficiency within tax authorities can deter people from participating in the formal tax system, as trust in government institutions plays a crucial role in compliance. Scepticism about how the government utilises tax revenues can lead to reluctance in filing returns.

Incentive structures within the tax system also influence compliance rates. Many individuals do not perceive immediate benefits from filing taxes, especially if they do not directly receive services in return.