On the topic of direct taxes, the Indian mechanism seems outdated and far too complicated. There have been changes to the Income Tax Act over time and they have only added layers of further complexity to it, bringing along poor administration and ambiguities. The need of the hour is to reform the direct taxes the way (Goods and Service Tax) GST reformed the indirect tax system. Like GST, direct tax machinery would also benefit from a simple, uncomplicated and clear mechanism. Thankfully, the government realises that too.
Which is why the proposed new direct tax code will replace the Income Tax Act of 1961. This existing direct tax code deals with personal income tax, corporate tax and other genres such as the capital gains tax. The government has established a task force to overhaul this current system of taxation to align it with the global practices and economic needs of the country.
We bring you a roundup of the top 5 reforms we think need to be urgently introduced in and through the Indian Direct Tax Code.
5 Reforms needed in Indian Direct Tax Code:
Lower personal tax rates to incentivise defaulters
Bringing more people into the tax net and bridging the disparities
Lower corporate tax rates
Remove exemptions and deductions and anomalies
Focus on minimising litigation
1.Lower personal tax rates to incentivise defaulters:
High tax rates are a sure shot formula for lower tax compliance. Lowering the tax rate will leave more disposable income in the hands of consumers, enabling them to spend more, and in the process accelerating the faltering economic growth. If the goal is to minimize and eliminate tax evasion, a progressive taxation policy is needed: a lower rate for lower incomes and higher rates for higher incomes. Another added issue that needs fixing is that while the salaried professionals in the formal sector dutifully pay their taxes, there is hardly any regulation in the informal sector to ensure compliance.
2.Bringing more people into the tax net and bridging the disparities:
Following from the suggested reform of a progressive taxation system, one way to make the system more equitable for different classes of taxpayers is by extending the tax net to a larger bracket. It is often suggested that for individuals, those earning below ₹5 lakh need not be taxed. Those between this floor and ₹10 lakh be taxed at 5%, and those with income between ₹10 lakh and ₹1 crore should be taxed at 10%. The next slab till ₹10 crore should see 15% tax. Anything above that would be taxed at 20%.
While we are talking about bringing more people under the tax bracket, it is worth mentioning the rationale behind this: 90% of taxpayers contribute to 23% of the tax revenue. Here’s how these numbers add up: only 1.5% of our entire population pays the income tax. Only 30,000 people earn upwards of Rs 1 crore. A large chunk of the population is excluded from the tax bracket and that also entails larger arguments about the economy; hovering around capitalism versus socialism, when people don’t feel like they are getting the worth for the taxes they pay, or when people get benefits even though they don’t pay taxes. Additionally, the threshold for income tax needs to be revised periodically to counter the effects of inflation.
3.Lower corporate tax rates:
Reason? To make businesses more competitive. When the corporate taxes are reasonable, it encourages entrepreneurial spirit in the country, in addition to the obvious benefit of boosting compliance. Suggestions for bringing down the dividend distribution tax to 10 per cent from the present 20 per cent will also prove to be helpful for the economy. Upcoming businesses will then be encouraged to expand or start when they have favourable tax reliefs in place. Therefore, if you are thinking of starting one, you might also want to opt for a business loan from Finserv MARKETS where you can enjoy business loans up to Rs 15 lakhs, backed by online processing and easy repayment options.
4.Remove exemptions and deductions and anomalies:
A plethora of exemptions and deductions, adding to litigation on the taxation front, need to be removed. Simplicity is key here since many evasions occur due to the complexity of the mechanism. Unnecessary legal disputes also take place when tax authorities and audit authorities have different ideas about how the accounts should be maintained. Such anomalies, along with the dividend distribution tax which is also taxable in the hands of the investors, minimum alternate tax, etc. should be abolished.
5.Focus on minimizing litigation:
An estimated 3.9 lakh cases are pending before several appeal forums. Any attempts towards reducing litigation would be welcome, including alignment of audit and tax processes as mentioned before. It would also help if the tax assessment process were simplified.
Sitting on these five legs that seek to minimize tax evasion, we are optimistic it could improve the tax to GDP ratio. We have our fingers crossed for the implementation of the said policies as the Indian Direct Tax Code is introduced soon.
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