Income Tax Department to Harness GST Data for Expanding Taxpayer Base
The Income Tax (I-T) department is set to initiate a strategic move to drill into the vast repository of Goods and Services Tax (GST) data, aiming to significantly widen India's direct tax base and enhance overall compliance. This initiative comes as a response to moderated I-T revenue growth following sharp tax rate cuts for individuals in the current financial year, according to two anonymous sources familiar with the plans.
Leveraging Technology and Data for Tax Administration
The GST system is renowned for its technological prowess and comprehensive data collection at every stage of the production value chain, including goods transport and real-time reporting of wholesale transactions on a designated portal. This infrastructure has already proven effective in cracking down on large-scale invoicing scams. By tapping into this wealth of information, the I-T department expects to identify non-filers and under-reporters, thereby encouraging voluntary compliance.
The department's approach involves using a 'nudge' strategy, where assessees are informed about under-reported income based on data already available to the authorities, giving them an opportunity to revise or update tax returns and come clean. This method is part of a broader effort to make compliance easier and more transparent.
Driving Factors Behind the Move
With direct tax collections growing by less than 5% year-on-year in FY26 up to January 11, the need to expand voluntary compliance is evident. The revised direct tax collection target for the current financial year is ₹24.2 trillion, down by ₹1.26 trillion due to cooling inflation and income tax rate cuts aimed at stimulating consumption. However, officials remain confident in meeting this target through improved data utilization and outreach.
One source emphasized, "Revenue collection is the product of efficient tax administration and the department's ability to reach out to the relevant assessees. The more efficient the data collection, the better the revenue." This underscores the critical role of comprehensive data collection and leveraging technological advancements from agencies like GST.
Expert Insights on Tax Base Expansion
Deepashree Shetty, partner at BDO India, highlighted that a trust-based approach supported by emerging technologies can make a meaningful difference. "Behavioral initiatives like the nudge campaign have already improved taxpayer responsiveness by encouraging non-intrusive self-correction," she said. Scaling such efforts through deeper data analytics, pre-filled returns, and seamless digital interfaces can reduce administrative burdens and strengthen accurate income reporting.
Amit Maheshwari, managing partner at AKM Global, noted that India's direct tax base still captures only part of the country's real income activity. "Since tax rates have already been lowered to competitive levels, the policy focus has to be on widening and deepening the tax base through better income reporting rather than raising rates," he added. He suggested using data and technology in a non-intrusive way, such as pre-filled returns and risk-based analytics, to focus scrutiny on higher-risk cases.
Current Tax Landscape and Future Projections
The move to leverage GST data is particularly relevant given that the total income reported by individuals and businesses in income tax returns matches only about less than 40% of the country's nominal GDP. For FY23, reported income stood at ₹102.5 trillion, approximately 38% of the ₹268.9 trillion nominal GDP. One source questioned, "Is it sufficient? The answer is no. We should look at the tax landscape in this spirit also."
Looking ahead, direct tax revenues of the central government are expected to grow 11% next financial year. With nominal GDP growth projected to pick up to 10%, tax buoyancy—the rate at which tax revenue grows over economic growth—is expected to be 1.13, nearly at par with this fiscal's 1.16. This indicates a positive trend, but further efforts are needed to bridge the compliance gap.
In summary, the I-T department's initiative to integrate GST data marks a significant step towards modernizing tax administration, aiming to foster a more compliant and transparent tax ecosystem in India. By harnessing advanced data analytics and a non-adversarial approach, the department seeks to balance revenue goals with taxpayer convenience, ultimately contributing to a stronger economic framework.
