A slowing economy impacts growth in income tax returns

The number of income tax returns filed for FY 2017-18 stood at 68.7 million. However, the number of income tax returns filed so far in FY 2019-20 is down by 2% at 67.4 million. 

Income tax return filing sharply rose in FY 2016-17 owing to ‘Income Declaration Scheme 2016’ and ‘Demonetisation scheme’. Income tax returns filed in FY 2016-17 recorded a rise of 20.5%. ‘Income Declaration Scheme 2016’ was an amnesty scheme to encourage taxpayers to disclose undeclared income. ‘Demonetisation scheme’ banned high-value currency notes to combat the ill effects of black money in the country.

For FY 2017-18, the number of income tax returns filed recorded a rise of 23.1%. The rise was when the economic growth slipped to 7.2% from 8.2%. Earlier income tax return filings grew 6.5% in FY 2014-15 and 14.5% in FY 2015-16. 

The rising trend has however reversed in the FY 2019-20 with the number of filings down by 2% at 67.4 million so far. The economic growth has been low in FY 2019-20. GDP grew at 5% for Q1 and is expected to be below 5% for Q2 of 2019-20. The return filing has slowed down in the backdrop of a slowing economy. 

Earlier, the amnesty scheme, demonetisation and persuasive steps taken by the income tax department had contributed to the surge in income tax filings. The economy too grew at 8.2% in FY 2016-17. However, the growth momentum has waned out in FY 2019-20. 

The composition of taxpayers keeps changing with a change in income levels, demographics, growth in business, and so on. The number of taxpayers may increase due to new employments, first time earners, setting up of new businesses, and so on. Likewise, the number of taxpayers may decrease due to death, retirement, closure of business, losses due to unfavourable business conditions, and so on.

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A public survey of ‘Demonetisation’ reveals that it had a positive impact on tax filings, while it led to an economic slowdown and loss of business, especially in rural India. 

A survey done by LocalCircles, an online community and social platform for citizens revealed that 75% of the 8,500 people surveyed said that demonetisation helped reduce black money, increase tax receipts, and brought evaders into the tax net. However, the former economic affairs secretary Mr Subhash Chandra Garg said that cash in the system remains high and that the Rs 2,000 notes introduced after demonetisation are hoarded.

The government has been trying to reduce the currency-to-GDP ratio to develop India into a less-cash economy. However, despite their efforts, there has been an increase in the circulation of currency. The former economic affairs secretary has also called for another round of demonetisation to deposit high-value currency notes of Rs 2,000 whose concentration remains high.

With respect to digital payments, the former secretary admits that digital payments have recorded substantial growth. However digital payments need a through penetration post the amendments to the Payment and Settlement Act made through Finance Bill 2019. Also, the amendment could adversely impact fintech firms. The firms have to do away with the Merchant Discount Rate, thus unable to recover their costs and charges. 

The government’s steps towards widening the taxpayers net created the initial momentum and effected compliance. However, low economic growth and low business incomes have adversely affected tax return filings and tax collections. 

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in