Salaried class shrank in FY20

In a worrying sign for the economy, the number of people earning up to ₹50 lakh, mostly from salaries, shrank in FY20 even before Covid caused a recession, income tax return filing data so far this year showed.

For those filing returns for FY20 in form ITR-1—people with income from salaries, one house property and farm income up to ₹5,000—the last date for filing was January 10, 2021. Data available till January end showed this class of tax filers, the biggest chunk of all tax filers, shrank 6.6% from a year ago.

The shrinkage in this category also mirrors a 6.5% contraction in overall returns filed till January-end by all classes of taxpayers, including companies, for income earned in FY20. But in their case, the data is not comprehensive—those requiring tax audits had time till February 15 to file their returns, which means the data does not cover last-minute filers.

The class of tax return filers is a dynamic one, with new taxpayers getting added every year and some leaving the group by way of loss of income or death. A fall in net filers points to a shrinking tax base. Worryingly, the shrinkage occurred in a year when the economy grew by 4%. This year, the economy is expected to shrink by 7.7%.

Experts said the drop—in both ITR-1 and overall filings—could be due to a combination of factors. “Possible confusion around the final due date and expectations of another extension may have played a role in the case of ITR-1 filing moderation. The possibility of employees not getting Form 16 due to closure of businesses, too, could have been a reason,” said Archit Gupta, founder and CEO of online tax services provider ClearTax.

“The lack of access to financial consultants in smaller towns, where people have moved to during the pandemic, may have contributed to the overall decline in ITR-1 filings, though it has led to a sharp improvement in filings from such towns through tax e-filing service providers such as ours,” said Gupta.

Sonu Iyer, tax partner and national leader-people advisory services at EY, said the real impact of Covid on incomes will be known from assessment year (AY) 2021-22 return filings.

Experts also pointed out that if one looks at returns filed by all individuals, including those filing tax return forms other than ITR-1 as they have income from business or profession, capital gains from unlisted shares or have signed up for a presumptive tax regime, the total number is almost steady in AY2020-21 as in AY2019-20.

However, the number of people filing returns has seen a drop in higher income categories. “Considering the impact of Covid on cash flows, there could be delayed filings as well, to manage the cash flow and pay taxes at a later point. A clear picture would arise when the complete data till the year-end is available,” said Divakar Vijayasarathy, founder and managing partner of DVS Advisors LLP, a tax consultancy.

An email sent to the income tax department remained unanswered till the time of publishing. Widening the direct tax base has been a priority for the government. After the November 2016 demonetisation and the 2017 rollout of goods and services tax , income tax return filings saw a sharp expansion, but has subsequently moderated.