Despite the reductions in tax rates, the direct tax to GDP ratio has increased. Yet, many believe that India has yet to achieve its tax potential. As the country sets its sights on achieving developed country status by 2047, the question is what tax policy can do next to ensure a balance between growth and equality.
In 1958, the Law Commission of India set out to logically arrange the Income Tax Act 1922 in order to simplify it. Experts admitted then that there cannot be any real simplification of the Act without the simplification of the tax structure. Decades on, the goals for income-tax reform remain centred around simplicity and stability. In the last five years, though, there have been efforts to improve the tax structure. Heeding the recommendations of previous tax committees, including the Direct Taxes Code in 2009, the corporate tax-rates were reduced earlier and incentives are being phased out under the new tax regime. Around 58 per cent of corporate taxpayers have opted for the new tax regime, lowering the effective tax rate to 23.26 per cent in 2021-22 as compared to 29.49 per cent in 2017-18. To further streamline the system and attract foreign investment, the corporate tax-rate on foreign companies has now been reduced to 35 per cent and the angel tax has been abolished.
Similarly, personal income-tax slabs are now fewer and simplification of compliance has brought on board more taxpayers. Between assessment years 2019-20 and 2022-23, the number of taxpayers increased from 89.8 to 93.7 million. The current Budget has further reduced the tax rate for incomes below Rs 12 lakh, which will impact more than 80 per cent of individual returns and 51 per cent of the gross income filed in returns. Although the revenue loss from the proposed direct tax changes is pegged at Rs 29,000 crore, it is less than the revenue foregone on account of current exemptions and deductions.
Despite the reductions in tax rates, the direct tax to GDP ratio has increased. Yet, many believe that India has yet to achieve its tax potential. As the country sets its sights on achieving developed country status by 2047, the question is what tax policy can do next to ensure a balance between growth and equality.
For one, the reform of the capital gains regime is on the agenda. This is in line with global thinking as many countries have attempted to reform the taxation of passive incomes after Covid-19. Interest has been further fueled by the surge in the capital market globally. India is no stranger to this boom with the Nifty 50 delivering a 26.8 per cent return last year. Policymakers in India are also cognisant of the rise in futures and options trading. The Budget proposed an increase in the capital gains tax on equity as well as a higher securities transactions tax on futures and options.
In the assessment year 2022-23, long-term and short-term capital gains made up 11 per cent of the gross incomes reported in tax returns. Around 60 per cent of the long-term capital gains incomes in 2022-23 were above Rs 500 crore and more than 40 per cent of the gains were reported by corporates. Therefore, the higher exemption limit of Rs 1.25 lakh on long-term gains is expected to primarily benefit the lower income category taxpayers, while higher rates on equity and removal of indexation, to the extent it results in higher rates, will help raise revenue from upper deciles of asset holding classes. Moreover, the rationalisation of the rates across asset classes and the removal of indexation benefits suggest that the government no longer seeks to prioritise investments.
An important aspect of certainty in the application of the Income Tax Act is the prevention and resolution of disputes. The Vivad Se Vishwas scheme offers one way to settle long-standing disputes. Shortening the period of reassessment and putting in place higher monetary thresholds for disputes are also ways to keep in check confrontations between taxpayers and the income tax department.
The government has announced its intent to review the IT Act. To fundamentally resolve the source of these disputes requires that the contentious sections of the Act be carefully redrafted. Simplification has been attempted in the past, but it is now hoped that the work over the next six months will help meet all the stated objectives.
The writer is associate professor, NIPFP
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First uploaded on: 03-08-2024 at 07:05 IST
