Average income of middle-class Indians triples from Rs 4.4 lakh (FY13) to Rs 13 lakh (FY22)

Titled "Unveiling the Human Dimension of Income Tax Returns (ITR): Illuminating Trends in ITR Filing through Circular Migration of the Emerging Middle Class," an SBI Research report presents an insightful exploration of data relating to income tax returns. The study underlines the progressive shifts, including the escalation in the average income of the Indian middle class and a substantial decrease in the prevalence of returns denoting zero tax liability.

The Ascent of the New Middle Class in Circular Migration

Delving into the realm of income tax returns, the SBI Research report entitled "Deciphering Emerging Trends in ITR Filing: The Ascent of the New Middle Class in Circular Migration" offers a nuanced perspective on the evolving landscape. It elucidates the trajectory of the average income for the Indian middle class, tracing its ascent across the years.

From FY13 to FY22, the weighted mean of average income witnessed a commendable progression, surging from Rs 4.4 lakh to Rs 13 lakh. The report attributes this positive trajectory to two principal factors. Firstly, a significant number of taxpayers have transitioned from lower income tiers to higher ones, thereby elevating the overall average income. Secondly, there has been a marked reduction in the count of return filers who carry no tax liability.

The Evolution of the Middle Class

The report casts a spotlight on the transformation of the lower middle class into higher income echelons over the course of the past decade. In FY11, of the 16 million individuals who submitted tax returns, a substantial 84 percent fell within the income bracket of up to Rs 5 lakh. In contrast, by FY22, this group constituted only 64 percent of the 68.5 million ITR filers. Thus, compared to the FY11 benchmark, a noteworthy 13.6 percent of the population had transcended the lower income strata, progressively ascending by FY22.

A further optimistic development is the substantial decline in the prevalence of zero-tax liability returns. These pertain to tax returns where the taxable income falls below the basic exemption threshold, resulting in no tax obligation. The proportion of such ITRs diminished from 84.10 percent in FY11 to 64 percent by FY22.

Prospects of Escalating Income

Forecasts based on the report suggest that the average income is poised for further advancement, projected to reach Rs 49.70 lakh by 2047. This projection is underpinned by a confluence of factors, including an augmented number of tax filers and a shift in the distribution of filers from lower to higher income brackets. Furthermore, the report estimates that 25 percent of ITR filers are poised to transcend the lowest income stratum (annual income up to Rs 5 lakh) by FY47.

Punctual Filing and Streamlined Processing

In the domain of ITR filing and processing, recent years have witnessed marked enhancements, as indicated by the report. Among the 78 million returns filed in FY22, an impressive 75 percent were submitted by or prior to the due date, underscoring a substantial improvement from the 60 percent prevalence of late tax returns in FY19. The trend of timely filing is anticipated to persist in FY23, with the share of late ITR returns expected to reduce to 20 percent. The report attributes this positive development to heightened taxpayer discipline and the simplification of income tax procedures and forms.

The efficiency of return processing has also been enhanced over recent years. In FY21, 54 percent of the 59 million returns filed by the due date were processed promptly. Similarly, FY23 saw 64 percent of the 68 million returns filed by July 2023 being processed within the stipulated timeframe.

Expanding Workforce and Taxpayer Base

At a macro level, the report offers projections pertaining to the scale of the Indian workforce and the foundation of taxpayers. Forecasts indicate an increase in the Indian workforce from 530 million in FY23 to 725 million by FY47. This expansion is poised to be mirrored by a corresponding surge in the number of tax filers, projected to escalate from 70 million in FY23 to a substantial 482 million by FY47.

Additionally, historical data pertaining to state-wise ITR filing underscores that the five prominent states of Maharashtra, Uttar Pradesh, Gujarat, Rajasthan, and West Bengal collectively accounted for 48 percent of the ITRs filed in FY22. This trend extends further back in time, with Maharashtra, Uttar Pradesh, Gujarat, Rajasthan, and Tamil Nadu contributing significantly to the substantial upswing in the number of ITRs (amounting to 46 percent of the additional 481 lakh returns) filed between FY14 and FY22.

Growth Patterns and State-wise Dynamics

However, the report emphasizes the importance of interpreting state-wise data within the context of migration trends. An interesting observation is that, among the top six states where a majority of ITRs were filed, three states ― Uttar Pradesh, Rajasthan, and West Bengal ― exhibited a net negative migration. This contrasts conventional expectations; typically, outward migration (individuals relocating to different states for employment) would correlate with fewer ITR filings. This discrepancy can be attributed to the distinction between an individual's ITR, linked to their Permanent Account Number (PAN) address (usually representing their state of origin), and their workplace address (often in a different state).

Addressing this issue, the report recommends aligning the current address on the Aadhaar card with ITRs to provide a more accurate reflection of an individual's workplace.

Navigating the Path Forward

Furthermore, the report puts forth recommendations on utilizing tax returns as a means to capture socio-economic and cultural nuances of the migrant workforce. It suggests harmonizing PAN-Aadhaar data to effectively capture migration patterns driven by the pursuit of enhanced job prospects. The report proposes leveraging ITRs to gather information concerning the location (domicile, permanent residence, and workplace) of taxpayers.

Additionally, the report suggests enhancing user-friendliness by enabling ITR filing in multiple languages and integrating artificial intelligence-driven assistance within the tax filing process.

In summation, the SBI Research report casts a comprehensive spotlight on the multifaceted dimensions of income tax returns, unraveling the intricate narrative of the emerging middle class in the context of circular migration.