Despite numerous efforts by the Indian government to streamline and encourage the filing of Income Tax Returns (ITRs), the number of Indians who comply with this obligation remains pathetically low. This persistent issue not only highlights the need for more effective strategies but also underscores the necessity of a broader cultural shift towards tax compliance.
Current State of Income Tax Filing
As of the assessment year (AY) 2023-24, approximately 6.77 crore ITRs were filed by the end of July 2023. While this number represents a 16.1% increase from the previous year’s 5.83 crore filings, it is still significantly low compared to the total population and the number of eligible taxpayers in India.
The government’s targeted outreach efforts have seen some success, with over 53.67 lakh ITRs coming from first-time filers, indicating a gradual broadening of the tax base. Despite these improvements, the filing rate remains insufficient in a country with over 1.3 billion people and a workforce that spans hundreds of millions.
Reasons for Low Filing Rates
- Lack of Awareness and Education: Many citizens remain unaware of their tax obligations or the processes involved in filing returns. The complexity of the tax system further exacerbates this issue, making it intimidating for first-time filers.
- Economic Informality: A significant portion of the Indian economy operates in the informal sector, where income documentation is minimal or non-existent. This informality leads to many individuals not filing ITRs because their earnings go unrecorded.
- Perceived Lack of Benefits: Many taxpayers do not perceive immediate benefits from filing their returns. The absence of a direct correlation between tax payments and public services in the eyes of taxpayers discourages compliance.
- Fear of Harassment: There is a prevailing fear of harassment by tax authorities, which deters many from filing their returns. Historical anecdotes and public perception of the tax department contribute to this apprehension.
- Administrative Challenges: Despite the introduction of e-filing portals and simplified procedures, many find the process cumbersome. Technical issues with the online filing system and inadequate support further deter filers.
Penalties for Non-Compliance
To encourage compliance, the Indian government imposes penalties for not filing ITRs. These include:
- Late Fees: Under Section 234F, a late fee of ₹5,000 is levied if the ITR is filed after the due date but before December 31st of the assessment year. If filed after December 31st, the penalty increases to ₹10,000. For taxpayers with an income below ₹5 lakh, the maximum late fee is ₹1,000.
- Interest on Outstanding Tax: Interest under Sections 234A, 234B, and 234C is charged on any outstanding tax liability. These interests are calculated based on the amount due and the delay period.
- Prosecution: In severe cases of tax evasion or significant delay in filing, prosecution provisions under the Income Tax Act may be invoked, leading to fines and imprisonment.
Steps Towards Improvement
To address these issues and improve compliance rates, several measures can be taken:
- Enhanced Awareness Campaigns: More robust and widespread education campaigns are needed to inform citizens about their tax obligations and the benefits of compliance. Simplified communication and outreach efforts targeting rural and semi-urban areas could bridge the awareness gap.
- Simplification of Tax Processes: The tax filing process should be further simplified. This could include pre-filled ITR forms, reducing the paperwork required, and ensuring the e-filing portal is user-friendly and glitch-free.
- Incentives for Filing: Providing tangible benefits for taxpayers, such as preferential access to government services, tax credits, or rebates, could encourage more people to file their returns.
- Improved Support Systems: Strengthening the support systems for taxpayers, including better helplines, more accessible tax consultants, and responsive customer service, can alleviate the fear and confusion surrounding tax filing.
- Strict but Fair Enforcement: While penalties for non-compliance are necessary, the approach should be balanced with efforts to reduce taxpayer harassment. Transparent and fair enforcement can build trust in the system.
Conclusion
The low number of Indians filing their Income Tax Returns is a complex issue rooted in awareness, economic structure, perceived benefits, and systemic challenges. Addressing this requires a multi-faceted approach that not only simplifies the process and provides incentives but also educates and supports taxpayers throughout their filing journey. With consistent and concerted efforts, India can hope to significantly improve its tax compliance rates, ensuring a more robust and equitable financial system.
