With the Union Budget for 2025-26 scheduled for presentation on February 1, 2025, discussions regarding personal income tax filings and the increasing divergence between the number of Permanent Account Numbers (PAN) granted and income tax returns filed have become topical. Each year, the Finance Ministry reiterates that many an Indian does not file their income tax return or any return of taxes that may be due from them. In this article, we shall try and delve into the numbers that give credence to that statement and examine some possible remedies to boost compliance and revenues from personal income tax.
As it stands, the majority of taxpayers under the Item of Income, therefore, consist of salary earners, pensioners, and those making some form of investment in financial assets. Taxpayers in this category appear to go through the double taxation system whereby income on any savings is, in turn, taxed on income and interest earned on dividends. However, this remains a minority group, a group that has begun to contribute a significantly increasing share of the overall tax revenue. However, larger exemptions run riot in the widely unaccounted-for tax population that should have theoretically contributed to the country’s tax coffers.
Disparity Between PAN and Returns
If there is one other very striking number in respect of tax compliance, it is the contrast between the number of Permanent Account Numbers allotted and the actual number of income tax returns filed in India. Consider the numbers for the financial year 2023-24:
As up to March 31, 2024, PAN cards were issued to the Income Tax Department for Individual: 73.15 crores. Returns filed by Individuals for the year ending March 31, 2024, were: 7.28 crores. This indicates that less than 10% of those having a PAN card have filed their income tax return and gone under an assessment for tax. A large chunk of the remaining 90% assumes that TDS has already taken care of their taxes, which may not be true.
The government expected to earn about ₹11.87 lakh crore from personal income tax (excluding corporate tax) for 2024-25. With 7.28 crore returns filed, therefore, the average tax collection per filer is barely around ₹1.63 lakh. Such a low average is mainly because there are many self-employed and informal individuals who are either scarcely taxable or not taxable at all and may or may not be filing their tax returns.
This raises an important question: why is the number of PAN cards so high, but the returns filed are very few?
The most likely reason for the huge gap in PAN cards issued vis-a-vis returns filed is TDS (Tax Deducted at Source). When an individual possesses a PAN card, a reduced TDS is applied on certain incomes, like dividends. Certain individuals acquire the PAN card to avail of the lower TDS rates but do not file for income tax returns. Hence, the true taxable income of such persons is unknown, and consequently, the tax liabilities go unchecked.
In the absence of returns, there is no way for tax authorities to establish the actual range of an individual’s taxable income. This works well for all others who care less about presenting their taxable income, offering an avenue for lower TDS rate benefits while shunning the whole process of filing altogether.
The Way Forward: More Comprehensive Income Tax Filings
This is certainly an area that the Income-tax Department may want to address in order to improve tax collection by observing persons with TDS but no tax return. One way of doing this will be to cross-verify data available in Form 16 (for salary income) and the Annual Information Statement (AIS) pertaining to the PAN of an individual. Тhrough this method, the authorities can identify those individuals on whom TDS was deducted and yet did not file returns.
To begin with, the department could approach persons in whom significant TDS deductions are made and ask them why they have not filed their returns. This may then reveal amounts of tax revenue which may yet be lying uncollected. Also, the philosophy held by many income tax consultants on the matter is that filing an income tax return should be mandatory for everyone with a PAN card and deducting TDS. That way, it is ensured that those who get TDS, pay due taxes, and also with a focus on the ease of tax filing.
The Role of a New Easy Income Tax Code
The government has been talking about a possible new income tax code that would be easy. While such new tax reform may ease things, it ought not to be at the cost of fairness and equity. Agricultural income, today being a focus of discomfort, is treated differently. Many who enjoy agricultural income may never even file a return to take undue advantage of the low TDS provisions. Any new tax code should strive towards making each major source of income taxable but save any minor income arising from post-tax savings in financial assets from taxation.
The tax filing mechanism should, therefore, hypothetically require all holders of PAN cards to file income tax returns, independent of the source of income. This will bring tax officials’ focus into priority areas while ensuring that all are brought to account for their fair share of taxes.
Justifying the Need for a Unified Tax System Basically, for the betterment of India in her Income Tax collection, the driving factor shall be that many should file Income Tax Return. The government can increase tax compliance by easing the process and making it mandatory for PAN cardholders to file ITRs. This will generate more revenue from taxes to meet national infrastructure, education, defense, and other public services.
Though functioning, the current system lacks focus to make individuals pay taxes, especially those cases where TDS has been deducted, to file returns. A more open and participatory tax system in India could handle the existing gap between PAN cards issued- and income tax returns filed that would open the door towards generating a considerable amount of untapped revenue.
The next Union Budget could be the launch pad for these much-needed reforms, which ensure that all contribute their fair share to the financial health of the state.
