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India has a very large population of around 147 crores. However we have a relatively low percentage of income tax filers compared to its working population.
This document covers on the need for increase in tax compliance in India, and ways that the IT department can follow to enhance the tax compliance. This in a way to reduce the individual tax rates due to increased tax base and tax collection.
This document covers
India has a very large population of around 147 crores. However we have a relatively low percentage of income tax filers compared to its working population.
As the Indian Income Tax Department integrates AI and machine learning to curb illicit wealth, further strategic interventions can be implemented to expose 'black money,' strengthen compliance, and ultimately lower the tax burden on honest taxpayers.
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
The key reasons for lower tax filing are as follows
Increasing tax compliance is crucial for higher revenue collection, better public services, economic growth, and to reduce the individual tax rates with an increased tax collection. Below are key strategies that the income tax department can follow to increase the tax filing population in India
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.
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.
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
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.
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.
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.
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
BTW: A quick Grok (AI) search reveals the following... on the magnitude of high value transactions in India during CY 2025.
| Category | Quantity/Amount | Notes |
|---|---|---|
| 🚗 Cars Sold | 45,29,913 units (45+ Lakhs) | Passenger vehicles (including cars, SUVs, and vans) reached a record high, driven by strong demand in SUVs and EVs. |
| 📱 Smartphones Sold | 15,20,00,000 units (15+ Crores) | Shipments grew marginally by 0.5% YoY, with a focus on premium segments despite overall market flatness. |
| 🏠 Apartments/Housing Units Sold | 3,48,207 units (~3.5 Lakhs) | Residential sales across top eight major cities (e.g., Mumbai, NCR, Bengaluru) remained stable, with premium homes (>₹1 crore) accounting for ~50% of sales. This figure covers primary markets in key urban areas, which represent the bulk of organized real estate activity in India; total nationwide (including tier-2/3 cities) would be higher, estimated at ~500,000 units when including secondary sources. |
| 💰 Physical Gold Consumption | 710,900 kg (710.9 tonnes) | Total demand (jewellery + bars/coins) declined 11% YoY due to record prices, but value reached ~$81 billion. Jewellery: 430.5 tonnes; bars/coins (investment): 280.4 tonnes. |
| 📈 New Investments into Stock Market | ₹7,72,000 crores (7.7 Lakh Crores) | Refers to record domestic institutional investor (DII) inflows into equities, offsetting FPI outflows of ₹158,407 crores. This reflects strong retail participation via mutual funds and SIPs. |
* above table credits to Grok AI
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.
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 algorithmor AI centric model can find such patterns to alert the buyer to showcase the proof of income using existing SFT alert / notice modal.
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.
While India's income tax department is rapidly adopting Artificial Intelligence (AI) and machine learning to combat black money, below are additional ways to uncover black money and impose tax compliance and to reduce the effective tax rates on regular taxpayers.
AI analyzes massive datasets from banks, GST filings, UPI/digital payments, billing software, and high-value transactions to spot anomalies like unexplained wealth, suppressed sales, or mismatched income-expenditure.
AI builds 360-degree taxpayer profiles by integrating data from banks, GSTN, SFT (Statement of Financial Transactions), social media spending signals, and foreign remittances. It assigns risk scores to flag potential non-filers or evaders for "nudges" (e.g., pre-filled returns, SMS reminders, or notices).
Generative AI and big data tools recover deleted/modified records (e.g., erased invoices in restaurants or fragmented payments in real estate). This directly uncovers black money conversion tactics like split deposits or cash layering.
AI cross-references UPI (<₹2000 transactions), cash deposits, e-commerce seller data, and GST filings to identify potential non-filers in small businesses, freelancers, professionals, and cash-heavy sectors (e.g., restaurants, professionals exceeding cash receipt limits).
The upcoming regime emphasizes a rule-based, AI-enabled ecosystem for enforcement, reducing disputes and promoting trust-based compliance. AI will play a larger role in monitoring behavior, flagging high-value claims, and automating risk-based selections — directly aiding black money crackdowns and base expansion.
Disclaimer: This article provides an overview and general guidance, not exhaustive for brevity. Please refer Income Tax Act, GST Act, Companies Act and other tax compliance acts, Rules, and Notifications for details.