How Many People Pay Taxes in India?

India’s economy is a subject of global interest, particularly concerning its vast population and evolving financial landscape. Understanding how many people participate in the tax system provides insight into the formalization of the economy and the distribution of the tax burden. This exploration delves into the direct taxpayer base, the factors influencing tax compliance, and the broader scope of taxation in the country.

Understanding India’s Taxpayer Base

India’s direct taxpayer base has shown growth in recent years, indicating an expanding formal economy. In the assessment year 2023-24, the number of direct taxpayers reached 10.4 crore (104.1 million). This figure represents a significant increase of 82% from 5.7 crore in the financial year 2014-15. For the financial year 2023-24, over 8.09 crore (80.9 million) income tax returns were filed.

A “taxpayer” in India, under the Income Tax Act, 1961, encompasses any individual, firm, or corporation that pays taxes on their income or profits. This definition extends to various entities such as Hindu Undivided Families (HUF), companies, partnerships, Associations of Persons (AOP), and Bodies of Individuals (BOI). The term also includes individuals who have tax deducted at source (TDS) even if they do not file a formal income tax return. While the number of income tax return filers in FY 2023-24 constituted about 6.68% of the population, the broader taxpayer base, including those with TDS, approaches 99.2 million.

The direct tax-to-GDP ratio, a measure of direct tax revenue relative to the country’s economic output, has also seen an upward trend. For the financial year 2023-24, this ratio increased to 6.6%, marking the highest in the past fifteen years. It is projected to further rise to around 6.7% for the subsequent financial year. The combined tax-to-GDP ratio, encompassing both direct and indirect taxes, is anticipated to reach 11.7% in the financial year 2024-25.

Key Determinants of Tax Compliance

Several factors influence the size and growth of India’s direct taxpayer base. A significant aspect is the presence of a large informal economy, which operates outside formal regulatory and taxation frameworks. This informal sector, while providing livelihoods for many, presents challenges for tax authorities in identifying and taxing income that is not formally reported or recorded. Income generated within this segment often remains outside the direct tax net, thereby limiting the number of individuals contributing to direct tax revenues.

The income tax exemption threshold also plays a role in determining the pool of obligated taxpayers. The Income Tax Act, 1961, specifies a maximum amount of income not chargeable to tax, meaning individuals earning below this threshold are not required to pay income tax. This provision, while providing relief to lower-income groups, naturally narrows the base of individuals formally obligated to file returns and pay income tax.

Factors such as literacy levels, financial inclusion, and general awareness of tax laws also influence compliance. As financial literacy and access to formal banking channels increase, individuals are better equipped to understand and fulfill their tax obligations. The growing young population entering the workforce also presents a demographic opportunity to expand the tax base. As more individuals move into formal employment and higher income brackets, their contribution to direct taxes is expected to grow.

Direct vs. Indirect Taxation and Taxpayer Participation

Understanding “how many people pay taxes” in India requires distinguishing between direct and indirect taxes. Direct taxes, such as income tax and corporate tax, are levied directly on the income or profits of individuals and organizations. These are paid directly by the taxpayer to the government, and the burden of the tax cannot be shifted to another party. The statistics discussed earlier regarding the number of taxpayers and income tax return filers primarily refer to these direct tax contributors.

In contrast, indirect taxes are levied on the consumption of goods and services, rather than on income or wealth. Examples include the Goods and Services Tax (GST) and customs duties. Unlike direct taxes, the burden of indirect taxes can be passed on to the end consumer, as these taxes are typically included in the price of goods and services. This means that virtually every individual in India who consumes goods and services contributes to indirect taxes, regardless of their income level or whether they file direct tax returns.

Indirect taxes form a substantial part of the government’s revenue, collected by a much broader segment of the population compared to direct taxes. While direct taxes are progressive, with tax rates generally increasing with higher income levels, indirect taxes tend to be regressive, meaning the tax burden can disproportionately affect lower-income individuals who spend a larger percentage of their income on consumption. Therefore, while the number of direct taxpayers is a specific metric, the scope of tax payment in India is significantly wider when the universal contribution through indirect taxes is considered.

Government Measures to Broaden the Tax Net

The Indian government has implemented various measures to expand the direct taxpayer base and enhance compliance. One significant initiative involves the promotion of digital transactions across the economy. The increased adoption of digital payment methods creates a clearer financial trail, which assists tax authorities in tracking income and formalizing economic activities that might otherwise remain undocumented. This digitalization helps bring previously informal transactions into the taxable sphere.

Efforts have also focused on simplifying tax filing processes and increasing tax education. Simplifying tax forms and providing online platforms for filing returns aim to make compliance less cumbersome for citizens. Public awareness campaigns and educational initiatives are designed to inform individuals about their tax obligations and the importance of contributing to national development. Such measures seek to foster a culture of voluntary compliance by making the tax system more accessible and understandable.

Policy changes have also been instrumental in broadening the tax net. The linking of the Permanent Account Number (PAN) with Aadhaar, a unique identification number, has allowed tax authorities to cross-reference financial transactions and identify potential non-filers or under-reporters. Furthermore, the strategic use of data analytics and artificial intelligence enables tax departments to analyze vast datasets, detect discrepancies, and identify individuals or entities that might be eligible but are not currently part of the tax base. These technological advancements enhance the efficiency of tax administration and encourage greater adherence to tax laws.