The Economic Survey presented in Parliament today has said that the powerful stick to counter black money, demonetisation of Rs 500 and Rs 1,000 notes, should be followed by carrots as compliments going ahead.
Chief Economic Adviser (CEA), Arvind Subramanian is absolutely right in recommending a five-pronged strategy that could be adopted by the government:
• A GST with broad coverage to include activities that are sources of black money creation—land and other immovable property—should be implemented;
• Individual income tax rates and real estate stamp duties could be reduced;
• The income tax net could be widened gradually and, consistent with constitutional arrangements, could progressively encompass all high incomes. (After all, black money does not make fine sectoral distinctions);
• The time-table for reducing the corporate tax rate could be accelerated; and
• Tax administration could be improved to reduce discretion and improve accountability.
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While it is a fact that these measures were required even if the government would not have gone for demonetisation, the Economic Survey pushing them to assuage demonetisation pains may be a signal that it is ready to bite the bullet.
Though taking this as a certain reduction in the income tax burden of the people in a big way in the Budget tomorrow may not be correct, the government could announce a roadmap for this on the lines of the proposed lowering of the corporate tax rate from 30% to 25%.
Changes in the current slabs and rates—10% tax for income between Rs 2.5 lakh to Rs 5 lakh, 20% for Rs 5 lakh to Rs 10 lakh, and 30% on income beyond Rs 10 lakh annually—to a composite exemption level of Rs 5 lakh with scrapping of all exemptions, 10% in the Rs 5 lakh to Rs 10 lakh bracket, and 30% rate for above Rs 20 lakh income—could be closer to Direct Taxes Code 2009 recommendations, which suggested the top rate to be levied above Rs 25 lakh.
If this is not possible in one go, FM Jaitley may announce a roadmap for this to be attained in a gradual manner in the next two-three years.
This will take care of the ‘missing middle’ problem of the income tax—people paying lower taxes in the Rs 10-15 lakh bracket because of the 30% rate kicking in too early—and also deal with the creation of black money in a more effective manner by promoting people to pay tax.
To what extent, CEA Subramanian has succeeded in convincing PM Modi and FM Jaitley for this, will be known tomorrow, but there is no doubt that he has prescribed the correct medicine.
