- India’s core tax challenge is that only about 20 to 30 million people of 1.5 billion pay personal income tax.
- Only 6% file ITRs in India, with 80%+ of filers earning under ₹10 lakh and the new regime exempting up to ₹12 lakh.
- Creating more productive, formal jobs and businesses could naturally broaden India’s tax base.
India’s direct-tax base is expanding as the government reports 8.68 crore income-tax returns for Assessment Year 2024–25 (AY2024–25), with ₹18.7 lakh crore in gross tax payable.
However, informal and low-productivity employment remains widespread, making the long-term answer less about squeezing existing taxpayers and more about creating millions of productive, formal jobs and businesses.
India’s Tax Problem Is Concentrated Income, Not High Tax Rates
The income-tax collections in India are very concentrated since income is very concentrated. Only about 6% of the population files ITRs, and real taxpayers with a positive liability are estimated at 3-5 crore, or about 2-3% of the population.
Government officials have stated that about 76% of income-tax collections come from individuals earning more than ₹50 lakh a year. Other recent analyses indicate that around 45 lakh people, or just 0.3% of the population, account for roughly 80% of personal income-tax collections.
Approximately 80% of individual ITR filers have incomes below ₹10 lakh, with only about 1.4% earning more than ₹50 lakh and less than 0.5% earning more than ₹1 crore. The bigger problem is taxable income, not simply tax rates.
In the new regime, the income under ₹12 lakh is essentially tax-free with a standard deduction of ₹75,000 for salaried individuals under Section 87A of the Indian Income Tax Act. Rates are 30% on income exceeding ₹24 lakh, including surcharge and 4% cess, and large sections of India’s labor force are informal, agricultural or low productivity.
Why India’s Informal Economy Limits Tax-Base Growth
India’s informal sector is one of the largest structural constraints to expanding India’s direct tax base. India’s informal or unorganised workforce is estimated to be around 80% of the total labour force and the unincorporated non-agricultural sector alone employed an estimated 12.8 crore workers in about 7.9 crore establishments in 2025.
Meanwhile, low and irregular incomes, limited documentation, cash-based transactions, self-employment and low productivity make income harder to track and tax. This creates a natural barrier to compliance campaigns and digital tools since much of the economic activity that contributes to GDP does not generate easily taxable income.
How More Formal Jobs and Small Businesses Could Expand India’s Tax Base
More formal jobs can expand India’s tax base in ways higher tax rates cannot. Regular jobs can be most easily seen in TDS, provident fund contribution and formal reporting. India’s MSME sector includes roughly 7.5 — 8.7 crore enterprises, employs over 32–39 crore people, contributes around 31% of GDP, more than a third of manufacturing output and nearly half of exports.
Therefore, making more businesses formal can generate taxable income in regions. For instance, small businesses can create broader employment, raise incomes and expand the tax base compared with 20 large ones.
What Formal Employment Means for India’s Tax Base
Once India’s employment sector becomes formal, income becomes easier to track and tax through the TDS, payroll record, provident fund contribution and formal reporting. Regular salaried jobs also offer more predictable income, meaning there will be more workers with verifiable income who will ultimately reach the tax-free level.
By shifting more labor out of the informal sector and into the formal sector, India widens its current and future tax base without solely raising tax rates or cracking down on tax evasion.
Furthermore, the fiscal effect extends beyond personal income tax. An increase in stable and higher incomes will lead to increases in household consumption and GST collections, and formal workers are less likely to use bank deposits, mutual funds, insurance and equity markets.
Formal jobs also generate the demand for goods and services, hence distributing the taxable activities among businesses. Therefore, India’s real fiscal challenge is creating millions more people who can pay through productive formal employment and helping small businesses formalise and grow.
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