In 2004-05, the compliance rose to 78.2 per cent on a tax-payer base of 29.21 million. In 2005-06, this rose to 82.1 per cent on a base of 29.63 million. In 2006-07, this has risen to a new high of 85.3 per cent on a base of 29.79 million.

An income-tax official said the compliance level would increase further and result in higher tax revenues. Though the developed countries had a higher compliance level, the progress in India in such a short period was commendable, he added.

"There is a distinct change in the behaviour of tax-payers. As a result, the compliance level is going up," said another official. Better compliance and tax administration and fear of penalty have improved the overall direct tax collections, officials say.

Riding better compliance and a buoyant economy, direct tax collections increased by a historic 40 per cent to over Rs 2,30,000 crore (Rs 2300 billion) in 2006-07.

The growth is expected to continue in the current financial year. In fact, for the first time in India, direct tax collections may surpass collections from indirect tax, which is the norm in developed countries. In the first half of 2007-08, direct tax collections increased by 40 per cent to Rs 1,11,055 crore (Rs 1110.55 billion).

"Higher tax collections are a result of better compliance due to better tax administration and increase in salaries over the last three years," said Gaurav Taneja, partner, Ernst & Young.

The number of assessees who initially defaulted and were served notice by the income-tax department to file returns has also come down significantly in percentage terms in the last three to four years.

The number of returns filed after notices has come down to 1.2 per cent in 2006-07, down from 6.2 per cent in 2003-04. The number has come down from 1.44 million in 2003-04 to 0.98 million in 2004-05, 0.57 million in 2005-06 and 0.31 million in 2006-07.

From early indications in 2007-08, it seems the compliance level will go up further. Till August this year, the number of income-tax returns filed by individual assessees rose by 3.14 per cent to 1,42,81,677, compared with 1,38,46,368 in the year-ago period.