Reimagining tax compliance through trust

The true measure of a tax system lies not merely in how much revenue it collects, but in how willingly its citizens contribute to the exchequer. While effective enforcement is indispensable to ensuring compliance, sustainable revenue mobilisation ultimately depends on the trust, confidence and tax morale of citizens. I-T Act, 2025, presents India with a historic opportunity to reimagine this relationship and move towards a tax compliance framework that is not only simpler and more efficient, but also more responsive, transparent and trust-based.

The challenge extends far beyond legislative simplification and taxpayer awareness. It lies in leveraging this reform to strengthen revenue mobilisation, expand the tax base, improve India’s direct tax-to-GDP ratio (currently around 6.2%), enhance tax buoyancy (currently around 1.8% for non-corporate and 1.0% for corporate tax) and combat tax evasion. With 9.2 cr I-T returns filed in 2025, the imperative is to evolve from a predominantly enforcement-driven approach towards one that combines deterrence with facilitation, trust and voluntary compliance.

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Rebuilding the Fiscal Contract

The relationship between taxpayers and government may be understood through the concept of a fiscal contract — an implicit understanding that citizens contribute to the exchequer while government provides public goods, services and accountable governance. Theoretically, there is no quid pro quo to taxation, as taxes are generally intended to be unrequited payments to government. Citizens cannot make tax payment conditional upon receiving a pre-determined basket of services.

Nevertheless, taxpayers can reasonably expect revenues to be utilised efficiently and in the larger public interest. As Karthik Muralidharan argues in ‘Accelerating India’s Development’ (2024), India’s fiscal compact remains relatively weak, with taxpayers often unable to discern a tangible connection between the taxes they pay and the services they receive. This is understandable in a welfare state such as India, where a significant proportion of tax revenue benefits citizens who may not themselves contribute directly to the income tax pool. This then raises a familiar question: why should an individual pay income tax when housing, education, healthcare, travel and even security may be procured from the non-governmental sector?

The answer lies in recognising that taxation sustains much more than individual benefits. It finances national security, infrastructure, law and order, public health and education, social protection and economic stability — the foundations of individual prosperity and collective welfare. The challenge is not to establish a direct exchange between taxes and benefits, but to make the broader social value of taxation visible, credible and understandable.

Tax Morale and Quality of Public Expenditure

International research increasingly identifies tax morale—the intrinsic motivation to pay taxes — as a critical determinant of compliance. It is shaped by perceptions of fairness, equity, reciprocity, accountability, ethical conduct and social norms. Citizens are more likely to comply when they believe that the tax system is fair and public money is effectively utilised. The quality of public expenditure is therefore closely linked to tax compliance. Better governance and efficient public services enhance trust, while perceptions of wasteful or ineffective expenditure can weaken taxpayers’ willingness to contribute.

Also Read: CBDT MAPs out rules for foreign taxpayers

The February 2025 RBI Bulletin paper, ‘Quality of Public Expenditure and its Socio-Economic Impact in India,’ underscores the importance of capital formation and developmental expenditure for sustained growth and equity. Similarly, the NIPFP study, ‘Assessing Public Expenditure Efficiency in Indian States’ (2018), highlights significant inter-state variations in expenditure efficiency and the influence of governance on outcomes in education and health.

These findings reinforce an important proposition: improved governance and expenditure quality strengthen public confidence, which, in turn, can contribute to higher tax morale and voluntary compliance. The strategy must be two-pronged: improve the quality of public expenditure while communicating more effectively how tax revenues contribute to public welfare. This communication should extend beyond GoI expenditure to state government spending, since education, healthcare, local infrastructure and public transport delivered by States are often more immediately visible to taxpayers.

Reorienting Taxpayer Outreach

The I-T Department’s outreach under I-Tax Act, 2025, provides an important opportunity to advance this agenda. The 400-plus programmes conducted since April 2026 are commendable, but their scope and reach need to be substantially expanded. First, outreach should cover every district and parliamentary constituency, irrespective of its current tax contribution. Potential taxpayers are distributed across the country, and expanding the tax base requires a geographically inclusive approach. My own experience of the outreach programmes in small places – Kargil and Leh (Ladakh), Pulwama and Sopore (J&K), Navi Mumbai and Ghatkopar (Mumbai) underline the importance of reaching out to relatively small to medium taxpayers in building confidence and dispelling apprehensions. Second, these programmes must transcend the narrow objective of disseminating information about the new statute. They should evolve into platforms for engagement, trust-building and meaningful dialogue. Taxpayers should be encouraged to raise concerns, provide feedback on new initiatives, such as faceless assessment and appeals, and suggest improvements. Persistent systemic challenges — including the rising volume of appeals and tax arrears exceeding ₹42 lakh crore — should also receive attention. Most importantly, outreach must explain how taxes contribute to the larger public good. Budgetary allocations for defence, infrastructure, education, health and other essential services should be communicated in simple and accessible terms. Departmental officers need oriented themselves on the quantitative and qualitative dimensions of public expenditure by both the Union and State Governments. They should be equipped to explain not merely the obligation to pay taxes, but also the social and economic rationale underpinning that obligation. This would transform taxpayer outreach from a statutory awareness exercise into an instrument of trust-building. Research indicates that well-designed taxpayer education programmes can improve tax knowledge and compliance, primarily by facilitating compliance and potentially by enhancing willingness to pay.

A New Paradigm of Tax Compliance

The success of the Income Tax Act, 2025, will depend not merely on legislative simplicity, technological efficiency and enforcement capacity, but also on whether citizens perceive the tax system as fair, transparent and responsive. The Income Tax Department can play a pivotal role through sustained engagement, improved facilitation and effective communication. However, governance, quality of public expenditure and broader citizen trust remain responsibilities beyond its remit. Ultimately, India must move towards a compliance framework in which enforcement, facilitation and tax morale reinforce one another. The objective is not to dilute the statutory obligation to pay taxes, but to strengthen the willingness to fulfil it. The true promise of the Income Tax Act, 2025, lies not merely in simplifying tax law, but in strengthening the fiscal compact between the State and its citizens. A tax system that commands trust, demonstrates accountability and makes the public purpose of taxation visible is far more likely to secure sustainable voluntary compliance.