On a practical basis, there are many reasons why there should be further easing of both the income tax rates as well as the exemption limits.
During the Licence Raj days way back in the seventies and eighties, India had unbelievably high rates of tax on income. These rates, which on the highest slab were above 90% per cent at one point, were simply unsustainable and in many ways led to the formation of the parallel economy. Beginning with liberalisation in 1991, various reforms have happened in the IT sector. These have led to not only lowering of tax rates progressively, but also a gradual and continuous increase in the exemption limit.
As a result of all these steps, our income tax rates and exemption limits are certainly at par with the global averages. Moreover, both the tax collections as well as the number of persons filing tax returns have been increasing at a very robust pace over the last few years. In fact, this year we have recorded the highest tax to GDP in the last 10 years. Hence, at least theoretically, there is no strong case for a further reduction of tax rates or relaxation in exemption limits.
However, on a practical basis, thus, there are many reasons why there should be further easing of both the tax rates as well as the exemption limits.
Firstly, “being a huge and largely poor country, we do not offer any significant retirement and social security benefits to our citizens. Also, all attempts by successive governments at augmenting these benefits have resulted in excessive leakages and inefficiencies. Being a very large and diversified country it will always be better to encourage citizens to save more and look after a majority of their security needs themselves rather than the state stepping in and doing so. A reduction in tax liability will certainly go a long way in increasing the savings rate and enable individuals to better look after their welfare needs,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Secondly, all tax cuts create a feel good factor and a spurt in not only savings but also expenditures. The increase in savings and expenditures will improve business activity and spur economic growth. The loss to the exchequer will also be minimal as buoyancy in business should result in higher profits and neutralise to a large extent the loss in taxes due to lower rates.
Thirdly, lowering of corporate profit rates will attract investors and result in increased industrial activity and creation of more jobs — an objective which every successive government has struggled to deliver.
Lastly, from an administrative efficiency point of view, collection of indirect taxes taxes like GST and STT on securities are much easier to do than income tax. “With GST implemented, the whole system of indirect tax collection has greatly improved and become very effective. Since they are linked to consumption, a reduction in IT rates can somewhat improve the collections in GST. Otherwise some tinkering in GST rates and also improved efficiencies going forward can help the government reduce the impact of IT relaxations. Also, GST automatically taxes the rich more as they consume more whereas in income tax, due to many loopholes unearthed by savvy lawyers and accountants at the corporate and individual levels, that is not always the case. Therefore, from a social objective also relying more on GST and less on IT makes pragmatic sense,” informs Kapur.
Each country, in fact, has to evolve a system that suits their unique population better. By nature we are experts at finding loopholes with every law that comes into force. Hence unless the rates of income tax are kept fairly low, compliance will always be sketchy. “GST, on the other hand, is borne by the final consumer but collected from the manufacturer. It is structurally a much better and efficient way of collecting taxes in India. Hence, there is a strong case to keep lowering the income tax rates in India,” says Kapur.