1. Budget 2017 and income tax rates: Why Arun Jaitley should cut rates instead of hiking tax exemptions

Budget 2017 and income tax rates: Why Arun Jaitley should cut rates instead of hiking tax exemptions

Given the need to assuage demonetisation pains and the need to collect more taxes, finance minister Arun Jaitley is expected to cut tax rates on February 1, but he has to refrain from populism while doing so.

By: | New Delhi | Updated: January 13, 2017 6:51 AM
India’s tax-to-GDP is 5.4 ppt below comparable countries and just 15% of national income is reported to the tax authorities. (Reuters) India’s tax-to-GDP is 5.4 ppt below comparable countries and just 15% of national income is reported to the tax authorities. (Reuters)

Given the need to assuage demonetisation pains and the need to collect more taxes, finance minister Arun Jaitley is expected to cut tax rates on February 1, but he has to refrain from populism while doing so. Keep in mind, as the Economic Survey pointed out this year, India’s tax-to-GDP is 5.4 ppt below comparable countries and just 15% of national income is reported to the tax authorities. In this context, while hiking tax-exempt income to, say, Rs 3 lakh—or bringing back standard deduction as appears to have been recommended by the Easwar panel—will be popular, this will remove 15-20 lakh taxfilers out of the 130 lakh there are today. The Survey points out that, had the limits not been raised from FY09, there would have been 1.65 crore more returns and tax-GDP levels would have risen 0.32 ppt due to this alone.

Apart from greater efficiency in bringing in lucrative sectors like real estate into the tax net, the big challenge is the low compliance of those earning between Rs 10-15 lakh—tax compliance here is a mere 10% versus 20-25% in all other tax brackets, based on a comparison of the tax data with a theoretical income distribution of the country for that year. Since this is likely due to the fact that the top 30% tax bracket kicks in at a fairly modest level of income, the solution is to, say, create another bracket of Rs 10-20 lakh and tax that at, maybe, 20%. While this segment brings in around Rs 50,000 crore of taxes—based on data for AY 2014-15—the cut in rates will probably be more than made up by the impact of the increased compliance. This will necessitate cuts in rates in the lower slabs—in AY 2014-15, the Rs 2.5-5 lakh income group brought in around a tenth of personal income tax collections, so the loss in doing so may not be much while the move will be widely welcomed. Since the government loses around Rs 55,000 crore on various tax exemptions like those on insurance, it will be important to phase them out—while this will hurt those in the upper-middle income brackets, perhaps removing surcharges may neutralise the impact.

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Though the tax-exemption limit has been overtaken by time, much of this was a recommendation of the Direct Taxes Code in 2009 anyway—that recommended doing away with all tax deductions and taxing incomes of Rs 1.6-10 lakh at 10%, Rs 10-25 lakh at 20% and above that at 30%. The finance minister would do well to revisit that document.

  1. N
    N>G>Subrahmanyam
    Jan 14, 2017 at 5:50 am
    Dear Sir , I am of the opinion that every citizen must be made to realisehis responsibility to the Nation and paying Income Tax honestly must become an inborne cult The basic tax exemption limit for income for individual may be raised by Rs 50000/- The 10% tax slab may be considered upto Rs.7,00,000/=The 20% tax slab may be extended upto 12,00,000/= and 30% beyond and no surcharge. The ceiling of limit u/s 80(C) may be raised upto Rs2,00,000/=to encourage savings Standard deduction may not be reintroduced. Accordinglythe limits for ppf, lic, etc may be amended. Many a time I notice literate high placed senior citizens say " WE ARESENIOR CITIZENS WHY SHOULD WE BE TAXED BY THE GOVT? " My point isthat whensuch higly literate people of the country grudge and grumble againstthe govt to REPAY A PALTRY SUM TOWARDS INCOME TAX FROM OUT OF THEPENSION GIVEN TO THEM BY THE GOVT I feel that National spirit should be injectedinto their bloodby an i v transfusion . In my heart of hearts I feel that the existing limits are good and need no change at all. There can be a relief by increaseing the limit u/s sec80(c)upto Rs 2,00,000/=. This will definetely improve savings of individual especiallythe riat as these people cannot make jugglaries to show profit as loss. Lastly I suggest to make an enforcement to make PPF compulsary for every taxpayer as the excellant benefit that one realises is unimaginable at the time of withdrawl.
    Reply
    1. N
      Naran.V.
      Jan 13, 2017 at 7:05 am
      Calling tax exemptions as populism is CRUEL. Inability of the experts such as the author of this editorial to suggest concrete plans to bring in more persons into the tax net is turning itself into asking for not removing tax exemptions. Why are they not asking hard questions on the wasteful expenditures such as Shivaji memorial etc. Why Govt. Needs so much money? Why are there no aggressive push to tax donations to political parties? Over and above this, the cruelty is to reduce the bank interest rates and over and abvoe that taxes on deposits. Only decent people put their money in deposits whereas even a reasonably capable persons goes for private money lending earning huge returns. So effectively, Govt and experts are colluding to har the hapless honest citizens. Citizens should avoid making bank deposits and make small groups locally as a co-operations to do a joint business. Even if profit earned is one or two percent more, that would have taught a lesson to rulers.
      Reply
      1. T
        trutax
        Jan 13, 2017 at 6:14 am
        It will benefit the people and status of income tax returns for this year.
        Reply

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