In its 75th year of independence, India's taxpayer base and direct tax-to-GDP ratio remain pitifully low, both at less than 6%. Only 1% of people in the country pay income taxes. Additionally, because of the way the tax system is set up, wealthy individuals and businesses are better able to save money on taxes than their low-income counterparts.?
Administrative procedures and information sharing between the direct and indirect tax wings have helped the number of tax filers increase quickly in recent years.
One of the many distinct forms of taxes that governments use to pay for public services is income tax.Primarily, there are two types of taxes.
Individual Income Tax- Individual income tax ¡ª or personal income tax ¡ª is the tax individuals pay on their personal salary, wages or other taxable earnings. Most people don¡¯t pay taxes on all their income thanks to deductions, tax credits and exemptions.
Business (or Corporate) Income Tax- Business earnings from small businesses, corporations, self-employed individuals, partnerships and other business arrangements are also subject to income taxes. A business income tax typically applies to the income after subtracting capital and operating expenses from the business¡¯ revenue.
A quarter of those who file tax returns, or about 15 million people, or 1% of the population, actually pay income taxes. Income from individuals up to Rs. 5 lakh is exempt. Taxes must be paid on income beyond Rs. 2.5 lakh, however, if it surpasses this limit.
In the assessment year (AY) 2019¨C20, nine people in the nation had the highest annual pay income of Rs 100¨C500 crore, while 35 had the highest annual salary income of Rs 50¨C100 crore. This was the year that 47% of the 55.3 million people who filed tax returns that year indicated that their salary income, the main source of income for individual taxpayers, was zero.
AIS (Annual Information System) was rolled out in November 2021 to capture financial transactions of taxpayers beyond the TDS and TCS transactions. AIS is used by the tax department to pre-fill ITRs, which prompts taxpayers to report income correctly.
The average effective tax rate for domestic companies was 22.54% in FY20, down from 29.49% in FY18, as statutory rates varied between 25.17% and 34.94%. Firms with profit before tax of over Rs 500 crore have an average ETR of 20.19%, as many have shifted to the new 22% tax regime without exemptions.
First, the average effective corporate tax rate has decreased over time, mostly as a result of reductions in the statutory rate and changes affecting the tax treatment of investment and capital recovery (depreciation). Second, an increasing fraction of business activity is being carried out by partnerships and corporations, which are not subject to the corporate income tax. This has led to an erosion of the corporate tax base. And third, corporate sector profitability has fallen over time, leading to a further erosion of the corporate tax base.
Understanding the decline in corporate tax revenue could be helpful in preserving any tax reforms enacted, or structuring a reform to obtain a desired revenue effect, such as revenue neutrality or enhancement.