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The Rise of Zero Income-Tax Liability Claims: A Closer Look

Introduction

In recent years, there has been a significant increase in the number of individuals reporting zero-income tax liability. Despite a strong rise in overall income, the proportion of tax returns claiming zero-tax liability has continued to grow. This trend raises concerns about the extent of this expansion and its implications for the national treasury. In this article, we will delve into the reasons behind this surge in zero-tax returns and explore the impact it has on the country's tax base and compliance.

The Growing Trend of Zero-Tax Returns

According to data provided by the income tax department, an alarming 44.6 million tax returns, constituting two-thirds of all filings for the 2021-22 assessment year, reported zero-tax liability for the previous year's income. This represents a 4% increase in zero-tax returns compared to the previous assessment year, despite an overall income growth of over 14% in the tax returns filed for 2021-22.

It is worth noting that the number of tax return filers does not include individuals whose taxes were deducted at the source, such as by their employers, but who have yet to submit their tax returns. Therefore, the actual count of individuals with zero-tax liability may be even higher.

Understanding Zero-Tax Liability

To better comprehend the rise in zero-tax returns, it is essential to understand the concept of zero-tax liability. When an individual's taxable income is zero, but their income before factoring in exemptions and deductions surpasses the basic exemption threshold, it becomes mandatory to file tax returns. In such cases, individuals may not owe any taxes, but they are still required to report their income to comply with legal requirements.

Additionally, many individuals fall into the category of zero-tax liability due to various means, such as tax deductions, incentives, or having incomes below the basic exemption limit. These individuals may not owe any taxes, and some may even receive full tax refunds, further reducing the count of contributors to the national treasury.

Factors Contributing to the Surge in Zero-Tax Returns

Several factors have contributed to the increasing number of tax returns claiming zero-tax liability. One significant factor is the expansion of tax benefits specifically targeted at the middle class. These benefits include tax rebates and increased reporting obligations, prompting more individuals to file tax returns without incurring any tax liability.

The recently announced tax regime for the current year has introduced a tax rebate of up to Rs 7 lakh, further incentivizing individuals to file tax returns with no tax liability. This is expected to contribute to the continued increase in zero-tax returns.

Impact on the National Treasury

While the surge in zero-tax returns may indicate a broader tax base and enhanced compliance, it also raises concerns about the overall contribution to the national treasury. In the assessment year 2021-22, out of India's vast population of 1.4 billion, only 22.9 million tax returns showed a tax payment for the previous year's income. This represents a minuscule fraction of the population actively contributing to the country's tax revenue.

The difference between gross income before factoring in tax benefits and the reported income subject to taxation in the 2021-22 tax returns amounts to a staggering Rs 7.25 trillion. This suggests that a significant portion of individuals falling into the category of zero-tax liability have managed to achieve this status through legitimate means, such as utilizing tax deductions and incentives.

Government Initiatives and Tax Compliance

The government has been actively encouraging individuals to transition to the new tax file regime, which offers lower tax rates and reduced exemptions. This initiative aims to simplify the tax regime, minimize disputes, and enhance tax compliance. Individuals who do not fully utilize the existing tax benefits under the old tax regime can benefit from the lower tax rates in the new regime.

To ensure accurate reporting and minimize the underreporting of income, the tax council has been improving its technological capabilities and expanding the scope of taxes deducted at source. The inclusion of taxes on virtual digital assets has also been introduced to corroborate income reporting.

Conclusion

The rise in zero-income tax liability claims despite a strong rise in overall income raises important questions about the extent of this expansion and its impact on the national treasury. While the increase in tax returns indicates a broader tax base and enhanced compliance, it is crucial to monitor the proportion of individuals reporting zero-tax liability. The government's initiatives to incentivize tax compliance and simplify the tax regime play a crucial role in shaping the future trends of zero-tax returns. As the economy evolves, it is important to strike a balance between encouraging compliance and ensuring the fair contribution of individuals to the national treasury.

 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

Frequently Asked Questions

Zero income-tax liability claims" refer to situations where individuals or entities report no taxable income or claim deductions and exemptions that reduce their tax liability to zero, resulting in no income tax payable for a given tax year.

The rise in zero income-tax liability claims can be attributed to various factors, including increased awareness and utilization of tax-saving provisions, deductions, exemptions, and credits available under the tax laws, as well as changes in personal or business circumstances.

Common strategies to achieve zero income-tax liability include maximizing deductions for expenses such as mortgage interest, charitable contributions, education expenses, and healthcare costs, as well as utilizing tax credits, deductions for dependents, and retirement account contributions.

Yes, it is legal to claim zero income-tax liability by accurately reporting income, deductions, exemptions, and credits as allowed under the tax laws. Taxpayers are entitled to utilize legitimate tax-saving strategies to minimize their tax liability.

Some potential challenges or risks associated with zero income-tax liability claims include the need for meticulous record-keeping and documentation, compliance with complex tax laws, scrutiny from tax authorities, and changes in tax regulations that may affect eligibility for deductions and credits.

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