The Narendra Modi government has formed a 'Task Force' to draft a new Direct Tax law to meet the present economic needs of the country. Here are the much-needed changes that will improve tax compliance in the country.
“India has become largely a tax non-compliant society.” This statement by the Finance Minister Arun Jaitley during his Budget speech earlier this year was not a mere rhetoric. The income tax figures substantiate the argument. Only 2.4 million Indians paid income tax in the last financial year 2015-2016. After the switch to the GST regime, the government has put the limelight back on the Income Tax Act, 1961.
The Narendra Modi government has formed a ‘Task Force’ to draft a new Direct Tax law to meet the present economic needs of the country, an attempt made by Congress’ P Chidambaram in 2009 through the Direct Taxes Code (DTC). The task force has been given six months to submit its report to the government.
Here are the 5 vital changes that will improve tax compliance:
1. Flat 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%.
2. Minimal corruption: According to Surjit Bhalla, efforts on institutional reforms for minimising corruption and policy reforms for encouraging voluntary compliance are very important.
3. A better administration: Dinesh Kanabar, CEO at Dhruva Advisors told CNBC-TV18 that India’s Direct Tax system needs administrative changes to improve compliance. “A better administration, where matters can be dissolved without going through a 20-year cycle
4. Consistency with EODB: Dinesh Kanabar said that whatever changes are proposed as the new Direct Tax law, it should be consistent with the Ease of Doing Business, otherwise it may backfire.
5. Changes proposed in DTC: Some economists argue that the changes proposed in the DTC should be brought back as it proposed simpler tax code and did away with unnecessary exemptions and created space for lower tax rates.
The DTC Bill was introduced in Parliament in 2010 and lapsed with the dissolution of the 15th Lok Sabha. The Bill had proposed annual I-T exemption limit at Rs 2 lakh, and levying 10% tax on income between Rs 2 lakh and Rs 5 lakh, 20% on Rs 5-10 lakh and 30% above Rs 10 lakh. For domestic companies, it suggested tax rate of 30% of business income.
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.
(First published on 22-11-2017 on www.financialexpress.com)