A report by brokerage firm Kotak Securities has mentioned that only 66.8 million filers have filed tax returns in the fiscal year 2018-19 as against 67.5 million returns filed in the previous fiscal 2017-18. Consequentially, the number of tax filers have gone down 1% on year on year basis.
The government has been referring to the enlarged tax base resulting from the demonetisation undertaken in the fiscal year 2016-17. Post the demonetisation move; the tax base has been expected to grow. Hence, the drop in the number of tax filers is a cause for worry from the perspective of fiscal target. Also, the fall in the tax filers does not bode well from a fiscal standpoint given that several economic activity indicators are also pointing to a slowdown in the overall macroeconomy.
The growth in the tax base is crucial for the medium-term growth of the economy. The report raises a question whether the tax filing compliance was weak in the second half of the fiscal year 2018-19 and indicates that it expects the new government would target an increase in the tax filings and collections for the ongoing fiscal year 2019-20.
The report indicates that the government would need to look at expanding the tax base using the data repository available post demonetisation and roll out of Goods and Services Tax. The report shows that there has been an increase in the number of filers in the higher income bracket and the government would need to use data analytics to analyse and expand the tax base.
The commitment made by the government for cash transfers in the last budget could lead to a slip in the fiscal targets unless the expenditures are rationalised keeping in view the budgetary math. Also, the weak tax collections are confirming to the economic slowdown pointed by the various economic activity indicators. This along with weak tax filing numbers would add pressure to an existing stressed fiscal space.