India’s tax system has undergone significant improvements in recent years. Taxpayers are paying advance tax on time and receiving refunds as early as seven days after filing their returns. But while India’s tax engine is revving harder, are there enough drivers?

Finance Minister Nirmala Sitharaman, in a conclave with the principal chief commissioners of the Central Board of Direct Taxes on June 23, said that the government has undertaken several significant reforms in recent years, particularly in faceless assessment, e-verification system, tax exemptions and changes in slab rates, and digital service delivery. She also emphasised the need for the timely processing of tax refunds and the proactive resolution of taxpayer grievances.

What portion of total tax collected is refunded?

The portion of gross tax collected that is refunded has touched an all-time high of 17.6 per cent in the financial year 2024–25. It was 13 per cent in FY2014–15. While the rise in refunds indicates an efficient tax system, it also highlights the excess tax collected from individuals.

Rising gap between gross and net collections

As the refunds rise, the gap between the gross and net direct tax collections is also widening. In F2015, the gap was 0.8 percentage points. This swelled to a high of 1.5 percentage points in FY2025, according to the CBDT. This indicates that more tax is being collected, which has to be refunded after the end of the year.

Where are the taxpayers?

There were only 7.5 crore returns filed by individuals in the assessment year 2023-24, against a projected adult population of around 97 crore, according to the Income Tax Department. This brings the tax base to a mere seven to eight per cent.

Notably, more than 50 per cent of the adult population file income tax returns in the United States. The low tax base is an indication of a disproportionate burden of taxes on the salaried class. It also points towards the exclusion of the informal economy.

Meanwhile, among those filing income tax returns, 27 per cent of the individuals have a gross average annual income of Rs 7 lakh, 17 per cent have income of Rs 4.8 lakh, eight per cent have Rs 12 lakh, and seven per cent have Rs 3 lakh as annual income.

– Ends

Tune In