Personal Income-Tax reform

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: Direct tax laws governing the levy of Income-Tax in India are still very complicated. They are frequently being amended, making it extremely difficult and almost impossible not only for the tax payers to keep abreast of the changes in the tax laws but also for the I-T administration.

The tax system should therefore be made simple and stable. It is also necessary to have a five-year fiscal policy regarding direct taxes after introducing most essential amendments to the Income Tax Act through the Finance Bill, 2006 and the forthcoming new Income Tax Bill, 2006.

Further, the tax rate structure is still very heavy, and forces the tax payers to resort to tax evasion, leading to black money, which is having a cancerous growth in the country. However, the recent policy initiatives of the government have given the tax payers a hope that the government may really reduce the harassment of innocent tax payers and make the direct tax laws so simple and workable as to lead to greater voluntary tax compliance and effective curbing of tax evasion.

In view of this optimistic note, we are giving hereunder essential suggestions for personal Income-Tax reform with the expectation that they would be incorporated in the Finance Bill, 2006 while preparing the Final Union Budget for 2006-2007.

Suggested changes in the Income-Tax rate structure for better tax compliance

The basic rates of Income-Tax should be contained in the I-T Act itself like the rate of wealth-tax. Changes in the rates, if any, may be made once in five years through the Finance Act of the relevant year concerned. Hence, the following essential suggestions are made for effecting changes in the Income-Tax rate structure for curbing the menace of black money and for better voluntary tax compliance.

No reform of Income-tax Law can be complete unless it has a reasonable and rational personal Income-Tax rate structure. In view of the rising prices, the next threshold for the initial rate of Income-Tax of 10% should be increased to at least Rs 4 lakh to have a real incentive for tax honesty and voluntary tax compliance. Likewise, the rate of Income-Tax on income between Rs 5 lakh and Rs 10 lakh should be only 15%.