The government is reportedly going to invite suggestions from the private sector and tax experts soon, as part of an exercise to rewrite the Income-Tax Act, 1961. The comprehensive review, as announced in Budget FY25, is expected to be completed in six months. There can be no two views on the fact that the Act has turned complex and unwieldly over the last six decades, with nearly 3,000 amendments, and hundreds resulting from court judgments. To be sure, there were similar attempts in the past too to simplify the law, most notable being the Direct Taxes Code drafted in 2009. The intent behind the redrafting of I-T Act is “to make it concise, lucid, easy to read and understand… reduce disputes and litigation, provide tax certainty and bring down the (tax) demand embroiled in litigation”. But the exercise must go well beyond this desirable, yet limited objective, and ought to be used as an opportunity to move further on the ongoing reforms in the direct tax laws.
The overarching purpose of the exercise should be to lay the ground for a medium-term plan to raise the tax-GDP ratio (Centre + states) to close to 25%, from around 18% now. While the ratio must be brought up to generate the public resources needed to fund the social development needs, the challenge is how to meet this objective, without ruffling too many feathers. The key is to expand the tax base, keep rates affordable to the taxpayers, and make the tax structure conducive for higher economic growth and revenue productivity. In fact, in her Budget speech, the finance minister did speak of “enhancing revenue” in the context of the proposed I-T Act review.
The Narendra Modi government’s last decade and more has seen demonetisation, one of the objectives of which was to launch a frontal assault on black money, and several compliance-boosting measures that constitute enhanced “tax effort”. The Modi regime has also ushered in simplified regimes, without exemptions and deductions. It has also been quick to tap on the trend of households shifting from savings to financial wealth creation (equity market exposure), and to physical assets like real estate. Revenue from capital gains tax is over `1 lakh crore already, and the fastest-growing one among all revenue heads. While all this has helped make some headway on revenue productivity, much is left to be desired. Tax-GDP ratio has risen by just 1.3 percentage points in the 10 years to FY24.
Also, the share of direct taxes in total tax revenues for the Union government needs to grow further from the current level of 53% (budgeted for FY25) to at least 65%, in the interest of progressive taxation. Policies must not only boost aggregate GDP, but also allow income to be more dispersed. As far as tax anti-avoidance measures are concerned, there is no point in pinning much hopes on the multilaterally coordinated mechanisms like G20-OECD, as these could unravel in an uncertain and increasingly polarised global economic environment. The domestic tax policy must be restructured to shun the current implicit taxation of investments and the (unintended) incentives for debt. It should also discourage shifting of profits abroad by corporates and individuals. The Indian economy is fast-evolving, as is evident from the preference for households to invest, rather than save. Global investors are bullish on the country. The tax policy ought to move in step with these developments.