1. Direct tax is next on Modi’s agenda. Can India have a flat income tax rate? Here are 3 classic examples

Direct tax is next on Modi’s agenda. Can India have a flat income tax rate? Here are 3 classic examples

A flat tax rate of 12% would be appealing even for a tax-shy Indian, and it is estimated that the compliance rate will increase by eight percentage points to 33%. Will Modi's direct tax overhaul consider a flat tax system, or at least a low tax system. Here are three shining examples

By: | Updated: November 24, 2017 11:32 AM
After switching to the new indirect tax regime of the GST, the Narendra Modi government has formed a task force to draft a new Direct Tax law to meet the changing economic needs of the country.

Four months after switching to the new indirect tax regime of the GST, the Narendra Modi government has formed a task force to draft a new Direct Tax law. The idea is to meet the changing economic needs of the country, and perhaps an efforts to reinstate the Direct Tax Code (DTC) in a new avatar. The Task Force in the next six months will submit its report to the government on how to fix the more-than-50-year-old Income Tax Act, 1961. While, simplification and better administration of the law are major reforms that India needs, according to economists; some even suggest going for a flat tax system or lower tax system.

Surjit Bhalla, a member of PMEAC, in an article co-authored with Arvind Virmani this January, advocated for flat tax system at 12%, saying it would be appealing even for a tax-shy Indian, and estimated that the compliance rate will increase by eight percentage points to 33%. The classic case of the flat tax system is of Hong Kong and Russia.

One of the poorest country during the World War II, Hong Kong adopted a flat tax in 1947 which led to higher compliance and dramatic economic growth. Moreover, instead of imposing a progressive tax scheme, it gives it as an option to its citizen. Prime Minister Narendra Modi, while addressing tax administrators at Rajasva Gyan Sangam this June cited the example of  “Give it up” initiative for voluntarily giving up gas subsidy, saying that the tax base too could be increased significantly, provided the tax administrators can demonstrate the leadership to bring about a change.

The second best case of high compliance and a flat rate is that of Russia. Russia stunned the world by adopting a 13% flat tax, which went into effect in 2001. Russia’s economy has expanded by about 10 percent since it adopted a flat tax. Most importantly Russia’s income tax revenue has grown to more than 50% as people found it fair and easier to pay.

New Zealand is called BBLR — broader bases and lower rates — country. In New Zealand, the tax law experts focus on taxing a lot of actions at a low rate, or flat rate and most importantly at the simpler tax code. New Zealand in 1980 did away with deductions and write-offs and instead applied lowest rates on average workers. With higher compliance, New Zealand is one of the countries with best income tax practices.

An attempt to redraft the Income Tax Act was also made by CongressP Chidambaram in 2009 through the Direct Taxes Code (DTC). It proposed simpler tax code and did away with unnecessary exemptions and created space for lower tax rates. However, the bill lapsed with the dissolution of the 15th Lok Sabha in 2014. The NDA government, since coming to power in 2014, has already implemented general anti-avoidance rules GAAR. In 2016 Finance Minister Arun Jaitley also promised to lower corporate tax rate to 25% in 5 years. Currently, income up to Rs 2.5 lakh per annum is exempt from tax for individuals.

  1. S
    Sivasankar
    Nov 24, 2017 at 9:44 pm
    Abolish income tax. Introduce transaction tax. Thus every section will be covered including the so called elite political agriculturalists
    Reply
    1. T
      tpthakur
      Nov 24, 2017 at 9:13 am
      Lower tax rate with doing away with the exemption is a good idea and would definitely increase the base and so the collection productivity/growth.
      Reply
      1. Joy Koruthu
        Nov 24, 2017 at 6:42 am
        A simple and easy to follow tax regime is good for the country.The highest tax rate should be 25 . Also every year/02 years it should be indexed to raise the threshold limit based on inflation
        Reply
        1. C
          Conscience
          Nov 23, 2017 at 11:18 pm
          Good. All the headache associated with 80C will go.
          Reply
          1. Kollengode Subramani
            Nov 23, 2017 at 8:29 pm
            Flat rate of 12 is a welcome move and our government needs to ensure that no citizen escapes from tax.As on today we have only 3 tax payers and many of them starting from vendors.automobile drivers, farmers,minorities and madrasas do not pay tax.They enjoy with taxpayers money and all transactions is to be done by cards system so that all should have bank account with them.By doing this no one will be able to escape from the tax system and it will definitely increase from 3 to 50 which is substantial and we have examples of Russia,Taiwan adopting this method.We should also get away for giving concessions to minorities as every one has to work and earn money.Free meal should also be banned as the government is using our money for free meals which makes people more lazy and avoid working for earning money. Free meal is started by dirty Politicians for vote bank and has to be stopped and if Politicians wants to continue this system then they can do from their personal wealth.
            Reply
            1. Viral Shah
              Nov 23, 2017 at 8:16 pm
              Also stop giving free money to farmers and subsidy to poor.
              Reply
              1. Ambalavanan Balasubramaniam
                Nov 23, 2017 at 7:32 pm
                The idea of Single rate of Income tax for all the assessees, irrespective of their income is condemnable. As India is a Socialist nation, as per the Cons ution of India, the Income-tax should be raised when the Income of the assessee rises.The idifference of income of the Wealthy people and that of the poor should not be more than 20 times, if not 10 times, as per the well-known Socialist leader Dr.Ram Manohar Lohia.Then only the poor people would be satisfied or otherwise there would be a violent revolution in India.
                Reply
                1. A
                  Aziz
                  Nov 23, 2017 at 5:23 pm
                  There must be TAX dependent on (liability Role and Responsibility) of a person e.g. Two persons A B earn same amount X but there responsibilities are different. Say person A have a family of one Child and one Spouse. Person B have two old Parents two or three Childs and one Spouse. We have to think of: A flat p TAX system is Justice is equity A Tax depended on liability Role and Responsibility will be Justice is Fair.
                  Reply
                  1. J
                    J C Arora
                    Nov 23, 2017 at 4:48 pm
                    A flat rate of 12 instead of existing (10,20, 30 slabs plus surcharge) with existing rebates will be a welcome step. It will demonstrate BJP government willingness to simplify direct taxes.
                    Reply
                    1. CA Kunjan Shah
                      Nov 23, 2017 at 3:45 pm
                      yes, for general public and for ease of business, flat income tax rate is badly required
                      Reply
                      1. Virendra Sason
                        Nov 23, 2017 at 3:31 pm
                        AFTER FORCING GST, INCOME TAX SHOULD BE ABOLISHED IN PHASED MANNER. IN THE MEAN WHILE INCOME TAX TO BE 10 FLATLY. PENSIONERS SENIOR CITIZENS( WITHOUT BUSINESS OR MINOR BUSINESS) TO BE EXEMPTED.
                        Reply
                        1. Imad Lohi
                          Nov 23, 2017 at 3:22 pm
                          Good move..
                          Reply
                          1. M
                            Manmohan
                            Nov 23, 2017 at 2:50 pm
                            Good Move
                            Reply
                            1. Sridhara Hiriyannaiah
                              Nov 23, 2017 at 2:34 pm
                              The simplest would be one month ry for all ried class. One month's average turn over for business class and exempt all taxes for petty sellers. No complications at all. Hope FM will see this
                              Reply
                              1. R
                                Rahool Sharma
                                Nov 23, 2017 at 2:28 pm
                                What works for rest of the world may not necessarily work for India. Instead of hasty moves like demon(etization). Proper research must be conducted considering the Indian mentality.
                                Reply
                                1. A
                                  Atul
                                  Nov 23, 2017 at 2:18 pm
                                  I wanted to check editor that my comment is not published ensure this.
                                  Reply
                                  1. K
                                    Kanchan Kamal Mukhopadhyay
                                    Nov 23, 2017 at 2:16 pm
                                    Whatever be the nature unless the tax officials behave properly every system is bound to fail. Black money rose to alarming level either because of incompetence or venality of tax officials. Ensure a smooth efficient and honest tax administration first.
                                    Reply
                                    1. A
                                      Atul
                                      Nov 23, 2017 at 2:13 pm
                                      Mr Palkhiwala had also suggested Corporate tax of 15 for atleast one year and if the revenue falls short to go back to the old tax rates.But the Govt in general does not want to take risk.
                                      Reply
                                      1. A
                                        arpit
                                        Nov 23, 2017 at 1:51 pm
                                        what a brilliant idea to equate the tax burden of someone making 5 lakhs a year with someone making 50 lakhs a year, only in a country like ours can such exquisite ideas such as a flat tax rate be borne out of our intellectuals,and russia is a good example of a functioning system ?? this idea further demonstrates the fact that just like the UPA the NDA is incapable of taxing the rich an wealthy. Developed nations have tax rates as high as 45-55 on the Corporates and the wealthiest citizens how about taxing the big companies and Corporates more appropriately in this country
                                        Reply
                                        1. Saibal Nandy
                                          Nov 23, 2017 at 1:38 pm
                                          IT SHOULD BE FLAT RATE BASED ON INCOME SLABS
                                          Reply
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