Why Income Tax Collections Are Growing

The last date for filing income tax returns or the assessment year 2022-23 passed by on July 31. Despite glitches and numerous complaints on social media by chartered accountants as well as individuals who file their own returns, more than 50 million income tax returns were filed. Detailed and granular data on the revenue collected will be released after a time lag. But India Tracker takes this opportunity to bust a persistent myth peddled by a section of left wing economists that a reduction in income tax rates and the provision of tax exemptions to upper middle class households and individuals will lead to a decline in tax collections. Many have singled out the Rs 2 lakh per year exemption given on interest paid for housing loans as a classic case of elitism at the cost of the poor. The argument is: when the per capita income of the country is Rs 1.5 lakh a year, what is the point in giving a tax exemption of Rs 2 lakh a year for interest on housing loans? Whom does it help except the well off? Left wing economists have also frequently complained about the reduction n tax rates; the highest rate now stands at 30% apart from cess and other claims. Theoretically speaking, they have a point as the rich and the well off should pay more taxes so that the revenue can be utilised for welfare projects and schemes for empowering the poor.

But that’s exactly what data since the beginning of this century is showing. Despite the lower rates (compared to the past) and despite the slew of exemptions given under various categories, income tax collections in India have seen a sustained rise year after year. Even a brief look at the accompanying chart will confirm the fact. For instance, income tax collections in 2001 were a little more than Rs 33,000 crores. Within five years, they had doubled to almost Rs 64,000 crores in 2005. Income tax collections doubled again to Rs 133,000 crores by 2010 and doubled yet again to Rs 266,000 crores by 2015. In 2019, total income tax collections was Rs 473,000 crores. By 2022, income tax collections had zoomed to Rs 6,40,000 crores. In effect, income tax collections have gone up 20 times in about 20 years. That one set of data should lay to rest the myth that lower rates and exemptions lead to lower tax collections.

One reason for the improvement in tax collections is both lower rates and their stability. There was a time when the marginal income tax rate for the highest slab was 97%. That fostered a culture of tax evasion that persists even now. The other reason for improved collections is simplified procedures. Filing of income tax returns is still a big headache; but no longer a nightmare it was in the past. Most importantly, technology has convinced large sections of potential tax payers that evasion is not so easy any more.