Taxpayer and the missing trust: Can fairer rules help?

The Finance Minister’s lament in her Budget speech that India has too few taxpayers highlights a deeper truth about State capacity. In a country of 1.4 billion, only 8.09 crore income tax returns were filed in FY 2023-24 – just 6.7% of the population. Of these, nearly 4.9 crore reported zero taxable income. Even among filers, most do not pay. It is tempting to conclude that Indians simply dislike paying tax. But the problem is not only behavioural. It is structural and equally about what the system quietly permits.

India’s labour market remains dominated by informality. Millions earn low, irregular or seasonal incomes in agriculture, construction, small trade, and services. These are hard to measure and tax. As a result, the net tilts towards those easiest to see: salaried employees. Tax deducted at source leaves them no choice. In practice, India’s income tax becomes a tax on visibility. The other half of the story is more uncomfortable: multiple tax shelters shrink the effective base even among those who can pay. This is why the Finance Minister’s lament can sound unfair to honest taxpayers. Many citizens do not object to paying taxes; they object to being the ones with the fewest escape routes.

Take a common example. A car purchased in the name of a company is claimed as a business asset, with depreciation, fuel, repairs, and insurance written off. Yet it is used as the family car. Compare this with a salaried taxpayer buying a car from post-tax income, with no deductions. The same consumption attracts very different burdens. This pattern extends to travel, gadgets, mobile bills, and restaurant spending – all routed through business accounts under weak rules and weaker enforcement. Over time, it creates a two-tier culture: one in which tax is deducted automatically, and another in which tax is shaped by accounting creativity.

Family-run businesses split income among relatives to stay in lower tax brackets. Presumptive taxation, designed to simplify compliance, is often misused by enterprises that are no longer small. And, most politically sensitive of all, agricultural income remains outside the tax net. Even if justified for small farmers, the exemption creates space for high-income individuals to avoid scrutiny. Together, these practices erode credibility. In taxation, credibility is not a side issue; it is the foundation.

To its credit, the government has expanded the tax net. The CBDT reported that the number of taxpayers rose to 10.4 crore in 2023-24 from 5.7 crore in 2014-15. Technology, pre-filled returns, and easier filing helped. But the deeper question is whether this expansion feels fair. If filings rise but shelters remain open, trust will not keep pace. The easy temptation is to squeeze the visible base further – lower thresholds, reduce deductions, extract more from the salaried middle class. It is administratively simple but economically and politically unwise. It weakens consumption, deepens resentment, and pushes the system towards a narrow, high-pressure model.

A better approach is fairness-enhancing reform. The government should simply disallow personal-type expenses such as car running costs, restaurant bills, and gadgets like cell phones, when claimed as business deductions. Closing this loophole would immediately make the system feel fairer to salaried taxpayers who have no such escape routes. Another step towards fairness would be to adopt a common tax calculation format for firms, partnerships and companies. Today, the differences in rules allow scope for arbitrage and creative accounting. A uniform format would reduce loopholes, simplify compliance, and reassure taxpayers that the system does not privilege one type of entity over another.

Enforcement must also be less discretionary and more predictable. Fear of scrutiny discourages formalisation among small businesses. India’s taxpayer base will expand meaningfully only when formal jobs expand across a wider spread-out geography.

The Finance Minister is right to worry about India’s small number of taxpayers. But the way forward is not to scold citizens into compliance. It is to build a system where the burden is evenly shared, shelters are harder to exploit, and honest taxpayers feel the rules apply to everyone. A tax system cannot demand trust; it must earn it.

The writer is former chairman of the Export Import Bank of India is a banker with a theory of everything.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.