The 2014 Poll Manifesto of the BJP promised to provide a non-adversarial and conducive tax environment and rationalisation and simplification of tax regime. Tax rationalisation for a common man is mainly related to expansion of income tax slabs and lower prices on the goods and commodities. Every year tax payers look towards the finance minister to bring in some good news and some defer their investments decisions based upon changes in Budget.
However, every budget is a package where the government gives something under one head and takes something from the other head to keep the fiscal deficit at lower side. In the poll-bound season, the expectations of people are enormously high especially after bearing the pain of demonetisation. In the pre-budget memorandum of various institutions, requests have been made to Finance Minister Arun Jaitley to expand the slabs of income tax and to bring back standard deduction for the salaried class.
The accounting regulator ICAI has suggested to increase the exemption limit to Rs 3 lakh and expanding the slabs of taxation. The suggestion is to have nil tax on income from 0-Rs 3 lakh, 10 percent on income from Rs 3 lakh to Rs 10 lakh, 20 percent on Rs 10 to Rs 20 lakh and 30 percent on Rs 20 lakh and beyond.
The above said limits are in line with the observations of the Parliamentary standing committee on direct tax code which was proposed to replace the existing Income Tax Act, 1961. The finance minister had stated in his maiden budget speech in 2014 that the government will consider introduction of revised Direct Tax Code after taking into account the comments of various stakeholders. However, it becomes difficult for the finance minister to make any radical changes in the direct taxes which form around 50-55 percent of the total tax collection of the government.
The budget is an exercise where the revenues of the government are matched with its expenditure. During the course of five decades when the present Income Tax Act has been operational, the per capita income of the country has increased from less than Rs 9,000 to around Rs 88,000 in 2015. At the same time, the absolute number of poor has also increased manifold, warranting much larger government outlays besides investment in infrastructure and spends on Defence.
The rise of black money in the economy is also a cause of major concern despite the aspirations of the people for better living standards and their expectations from the government to lower the rates of taxation and to provide a conducive and friendly tax regime has also simultaneously increased. It is, therefore, necessary that these challenges in a growing economy and a developing society are kept in mind, while formulating any changes to the tax laws.
The tax rates and structure should, therefore, be tailored in a way that will ensure sufficient buoyancy and dynamism. As the economy expands and diversifies, the tax policies should match the growing needs of the economy and the aspirations of its people. Ways and means of augmenting revenue should aim at broadening the tax base and also by deepening the trunk to tap both potential as well as concealed incomes and wealth.
Almost 90 percent of the tax base in India comprises individual taxpayers in the Rs 0-5 lakh income slab without commensurate tax yield to the government which translates into around 3 crore assesees. Also, keeping in view the inflationary trends in the economy and the imperative to leave more disposable incomes in the hands of individual tax payers, particularly those in the lower income bracket.
Post demonetisation, the income tax department needs to focus their attention and resources upon higher income groups, untaxed or concealed incomes, and categories and sectors that are prone to avoidance or evasion. The revenue gap resulting from changes in tax structure, if any, should be easily bridged by way of stringent measures to curb and bring to book unaccounted money and through realisation of huge tax arrears and by way of savings from the proposed transition to the investment-linked incentive / exemption regime. Thus, rationalisation in tax structures and tax payer friendly measures coupled with zero tolerance policy on tax evasion may lead to better compliance and low generation of black money in the economy.
It is needless to say that the tax policy and procedures of the government should be fair, just and equitable, they should aim to bring fiscal stability. Fiscal stability together with certainty will no doubt go a long way in sustaining economic growth and development of the country. Time has also come to recognise the contribution of the tax payers and the government needs to do some creative thinking to create a positive impact in the minds of tax payers.
It needs to award and recognise the tax payers based upon their tax contributions. The government may consider providing benefits to tax payers directly in many ways such as preference in delivery of government services, social security benefits, exemption from tolls, benefits in various government schemes etc, which will not just lead to increased satisfaction of the tax payers but also reduce tax evasion and avoidance. This will also endeavor to increase the tax base as the people will be incentivised to show their real income.
Besides this, the corporate tax structure in India is very complicated and is often cited as a reason for lower rank of India in the ease of doing business. In the 2015 budget, Jaitley announced in the last Budget the corporate tax rate will be reduced to 25 percent from 30 percent in a phased manner, the move which was hailed by the corporate sector. However, the same has not yet been implemented for all companies in India and a lot needs to be delivered by the finance minister in this sphere.
With the talks of reducing the tax rates to 15% in the US post elections, the challenge is going to increase further for the finance minister who has to keep alive the ‘Make in India’ mission of our Prime Minister Narendra Modi.
This year, the task of the Finance Minister is going to be very difficult and has to balance the needs and requirements of various stakeholders and still have to look generous besides trying to increase the tax collection, all at the same time. Upcoming Elections in five states, too play a very crucial role, not only they hold road to higher seats in the Upper House, where the NDA is in minority but is also cited as a litmus test of the Central Government after the crucial demonetisation move.
Demonetisation has sucked up 86 percent of the liquidity from the market and also made people stand in long ques outside the banks and ATMs. Many rating agencies and research firms have reduced the expected growth rate of the economy as a result of demonetisation which poses a critical challenge for the finance minister to revive economy after such a bold move. The ball is in the court of the finance minister and it will be interesting to see whether he will be able to score a goal or score a self-goal if he fails to meet expectations.
(The writer is a chartered accountant)
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