Easing the Burden (GS Paper 3, Economy)
Introduction
- The pursuit of a simpler and more stable tax system in India has been a long-standing goal, dating back to the efforts of the Law Commission in 1958.
- The Commission's aim was to reorganize the Income Tax Act of 1922 to make it more logical and user-friendly.
- The experts acknowledged that simplification of the Act was inextricably linked to simplifying the tax structure itself.
- Today, nearly seven decades later, the focus remains on achieving simplicity and stability in income tax reform, while addressing the complexities that persist.
Recent Reforms in Tax Structure
Corporate Tax Reforms
Reduction in Corporate Tax Rates
- Overview: One of the significant reforms has been the reduction in corporate tax rates. This change was aimed at making the tax regime more competitive and attractive for businesses.
- Impact: Approximately 58% of corporate taxpayers have adopted the new tax regime, resulting in a substantial reduction in the effective tax rate from 29.49% in 2017-18 to 23.26% in 2021-22. This reduction is designed to enhance India's attractiveness as an investment destination.
Tax Rate for Foreign Companies
- Overview: To further stimulate foreign investment, the corporate tax rate for foreign companies operating in India has been reduced to 35%.
- Impact: This move aims to make India more appealing to international investors and enhance its global competitiveness.
Abolition of Angel Tax
- Overview: The government has abolished the angel tax, which was previously levied on investments made in start-ups and new ventures.
- Impact: The removal of this tax is expected to encourage more investment in start-ups, fostering innovation and entrepreneurship.
Personal Income Tax
Simplification of Tax Slabs
- Overview: The personal income tax structure has been simplified by reducing the number of tax slabs. This change is intended to make the tax system easier for individuals to navigate and comply with.
- Impact: This simplification has broadened the taxpayer base and improved compliance rates.
Budget Provisions for Lower-Income Groups
- Overview: The recent Budget introduced further reductions in tax rates for individuals earning below Rs 12 lakh annually.
- Impact: This change affects more than 80% of individual returns and represents 51% of the gross income reported. It is expected to provide financial relief to a significant portion of the population.
Direct Tax-to-GDP Ratio
- Increased Ratio: Despite the reduction in tax rates, India's direct tax-to-GDP ratio has increased. This indicates a growth in direct tax revenues relative to the country's GDP.
- Future Potential: Experts believe that India has not yet reached its full tax potential. As the country aspires to achieve developed nation status by 2047, future tax policies will need to strike a balance between promoting economic growth and ensuring equitable distribution.
An Eye on the Future
Capital Gains Tax Reform
Global Trends and Domestic Changes
- Overview: The reform of capital gains taxation is in line with global trends, as many countries have reevaluated their approaches to taxing passive incomes following the COVID-19 pandemic.
- Proposed Changes: The Budget proposes increasing the capital gains tax on equity investments and raising the securities transactions tax on futures and options. Additionally, the rationalization of tax rates across different asset classes and the removal of indexation benefits reflect a shift away from prioritizing investment incentives.
Dispute Resolution
Vivad Se Vishwas Scheme
- Overview: This scheme provides a framework for resolving long-standing tax disputes between taxpayers and the income tax department.
- Impact: By facilitating the settlement of disputes, the scheme aims to reduce litigation and enhance taxpayer compliance.
Reassessment Periods and Monetary Thresholds
- Overview: The government has proposed shortening the period of reassessment and setting higher monetary thresholds for disputes.
- Impact: These measures are designed to minimize conflicts between taxpayers and the tax authorities, making the process more efficient and less contentious.
Conclusion
- The Indian government has outlined its intention to conduct a thorough review of the Income Tax Act.
- This review will focus on redrafting contentious sections to address the root causes of disputes and improve the overall efficiency of the tax system.
- The reforms introduced so far reflect a broader strategy to modernize the tax regime, encourage compliance, attract investment, and support economic growth.
