Ways to Increase Tax Base in India — Explained

This document covers

1. Background
2. Current Scenario
3. Reasons for lower tax filing in India
4. Ways to increase the tax base in India

1. Background

India has a very large population of around 140 crores. However we have a relatively low percentage of income tax filers compared to its working population.

While efforts have been made to expand the tax base, a large segment of eligible taxpayers still does not file income tax returns (ITRs) due to various factors such as lack of awareness, informal employment, and tax evasion.

Increasing the tax filing population is crucial for higher revenue collection, economic growth, and better financial inclusion

2. Current Scenario

• For AY 2024-25, around 8.75 crores persons have filed the Income Tax Returns. This means only 6.25% people have filed the income tax returns.
• The number of persons who are filing ITR 4 and ITR 3 are drastically decreasing year by year.
• A significant portion of salaried employees, self-employed professionals, and small business owners do not file taxes.

3. Reasons for lower tax filing in India

The key reasons for lower tax filing are as follows

1. Lack of awareness: Many individuals don’t know the requirements and benefits of income tax filing.
2. Unorganized business: A significant portion of India's population are working in unorganized sector and generally they don't report their income, such as proprietor, freelancer based businesses.
3. Fear of Notices from Income Tax Department: Many individuals and small business avoid tax filing due to the fear of notices, scrutiny and penalties
4. Dominance of Agriculture Income: There are lot of people who depends on Agriculture income which is tax exempt. Hence most people think that it is not taxable and not required to file tax returns in India

4. Ways to increase the tax base in India

Increasing tax compliance is crucial for higher revenue collection, better public services, and economic growth. Below are key strategies that the income tax department can follow to increase the tax filing population in India

1. Track the UPI payments less than 2000:

   Most of the business operate in a unorganized sector. While UPI has revolutionized digital payments, frequent small-value deposits (below ₹2000) often go untracked, leading to underreporting of income and tax evasion.

   For example, having more than 50 deposits per month of Rs. < 2K per transaction is uncommon, unless the PAN is associated with a small business like a restaurant, shop, other services.

   By leveraging UPI transaction data, the Income Tax Department (ITD) can identify potential non-filers and encourage them to file income tax returns.

2. Tracking Cash Deposits in Bank:

   Many unorganized businesses operate in cash to avoid tax. Cash deposits in a bank account must be identified and notices should be sent to the taxpayers who are frequently depositing the cash in bank accounts.

3. Linking GST data with Income Tax filings:

   Many businesses register under GST and file GST returns but don’t file Income Tax Returns. These persons must be tagged, and automatic reminders should be sent to them to file Income Tax Returns

4. Linking rental agreements to income tax returns:

   Most of the property owners do not file income tax returns even though they are having rental income. This type of transaction should be tracked with the help of rental agreements and HRA claimed by tenant and reminders should be sent to them to file income tax returns.

5. Revenue received from outside countries:

   Most of the people are providing services to outside countries and getting the amounts in their bank accounts. Currently ITD is not tracking this type of income. Proper Mechanism should be in place to track this type of transaction and identify the potential non-filers and encourage them to file income tax returns.

6. Tracking E Commerce data:

   Many businesses sell the goods through e commerce portals like amazon, Flipkart etc but don’t file income tax returns. There should be a mechanism that the e commerce portal will report the revenue of sellers to ITD.

   By this way, potential non-filers will be identified and ITD can encourage them to file income tax returns.

7. Tracking High value expenditure:

   Most of the people spend lots of money on gold, car, foreign travel etc. These persons must be tagged, and notices should be sent to them to file their income tax returns

8. Recurring Deposits from different accounts:

   A pattern of recurring deposits in to savings accounts from different parties to convert black money in to white money. This is being a practice in real-estate property sales where the transaction amount in excess is being split in to small payments getting deposited from the buyers related parties.

   Using pattern matching, AI algorithms the IT department can easily find such tax evaders.

9. Buying a property without much income:

   Another area of non-compliance is of people having low income in the past years, suddenly purchasing high cost real estate. This usually means that the person might be having certain sources of income in the past years that are unaccounted through tax compliance.

   Again, a rule based algorithm can find such patterns to alert the buyer to showcase the proof of income using existing SFT alert / notice modal.

10. Allowed Cash receipt limits for Professionals:

    By law, certain professions (such as health care) in our society can still collect cash payments beyond a limit. Unfortunately, this became a way to evade income tax and the compliance around. Now in 2025, almost everyone do possess UPI and other digital means to pay, hence ITD should have a mechanism in place to monitor these professionals.