In a bid to spur economic growth, give major relief to taxpayers and make businesses more competitive, US President Donald Trump recently proposed a massive tax cut, what was hailed as ‘one of the biggest tax cuts in American history’.
Here’s what India can learn from Trump’s tax proposals:
1. Reduction in Tax Brackets: One of Trump’s tax reform proposal calls for reducing the number of tax brackets from seven to three for individuals, and also reducing the tax rate to 10%, 25% and 35% from the existing 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Though India already has only three tax slabs system as 5%, 20% and 30%, but considering the levels of income to which these slab applies there is great scope for further reduction in these tax rate specially for 2nd and 3rd slab. Alternatively the government can increase the level of income up to which these slabs will apply.
“This will leave the lower and middle income group people with additional disposable income which can drive back the consumption and the consequential economic growth to off-set any loss of revenue to the government. Beyond this reduced tax rate also means the lower motivation to evade the taxes and greater tax compliance, which in turn helps the government in increasing the taxpayer’s base and increased tax collection,” says Chetan Chandak, Head of Tax Research, H&R Block India.
2. Standard Deduction and Joint Filing: Under the US federal tax structure, an individual has an option to claim the standard deduction up to a certain amount which is available to almost all the individual taxpayers uniformly. Further, if a married person files a joint return with his or her spouse, this standard deduction is automatically doubled. Trump has proposed to almost double the standard deduction to $12000 in case of individual filing and $24000 in case of joint filing.
“This deduction relieves the small and middle income group taxpayers from the burden of making certain mandatory tax-saving investment (as required in India for claiming 80C deduction) and maintaining related records. Unfortunately, India does not have any such concept of joint filing and standard deduction under its tax structure. Indian tax authorities can consider bringing in some kind of standard deduction and also the concept of “Married Joint Filing” which can help the taxpayers in reducing their tax burden (especially married taxpayer whose spouse is a non-income earner by doubling their standard deduction),” informs Chandak.
3. Reduction in Corporate Tax Rates: Trump also proposed to slash the top tax rate for all businesses to 15% which is currently around 35% for corporations. The tax rate cut for business entity means a better profitability and a competitive edge in the global economy which can further drive sustainable and rapid growth in the overall economy of the country. When lower tax rates help the businesses, they also lea to increased revenue collection for the government by way of better tax compliance and collection (both direct and indirect). Further, increased tax collection means improvement in the government’s capacity to spend more on socio welfare activities. The Indian government can also think of reducing the corporate tax rates further to 20%.
4. Tax Relief for Child Care Costs: Trump’s tax reforms plan also calls for tax relief for child care costs. During the campaign, Trump proposed two tax breaks to ease families from the burden of child care costs. One would allow parents to deduct the average cost of child care based on child’s age and other would give a tax break to anyone who sets aside up to $2,000 a year to cover costs associated with child care and elder care.
“These contributions would be tax deductible and grow tax free. India also allows deduction for children’s tuition fees u/s 80C, but it is included under the overall limit of Rs 1.5 lakh. Considering the increased cost of the child education and care, it is very less. Also, Indian tax laws do not provide any tax incentive for taking care of the aging parents which is need of the hour. So the Indian tax authorities can consider either enhancing the deduction under 80C or provide a separate deduction for child and parents care cost,” says Chandak.