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Centre’s new direct tax code may lower rates, widen net

Lower income tax rates, and more tax-payers — that’s the overall aim of the new direct tax code being put in place by a committee appointed by the Narendra Modi government, according to an official

business Updated: Dec 04, 2017 08:11 IST
Gireesh Chandra Prasad
The panel, set up in November, has been given six months to submit its report, but the understanding in the government is that it could take longer.
The panel, set up in November, has been given six months to submit its report, but the understanding in the government is that it could take longer.(PTI File Photo)

Lower income tax rates, and more tax-payers — that’s the overall aim of the new direct tax code being put in place by a committee appointed by the Narendra Modi government, according to an official familiar with the matter, who asked not to be identified.

It is unlikely individual tax-payers will get to celebrate anytime soon, although the official mentioned a timeline of 2019. The panel, set up in November, has been given six months to submit its report, but the understanding in the government is that it could take longer, another finance ministry official said in November.

Still, it is significant that the government is thinking of lower rates as current tax rates and tax slabs are already more liberal than the ones suggested in an earlier draft direct tax code prepared by a panel under the United Progressive Alliance government.

The first official also added that the aim is to get more people to pay tax (currently only 4.5% of India’s 1.3 billion population does) and take the direct tax-to-GDP ratio to as close to 18% as possible, and explained the logic behind the 18% number. At present, about 20% of GDP is out of taxation on account of exemption given to agricultural income, which will continue in the proposed new direct tax code as well.

Other exemptions, and varying slabs, account for another 20% of GDP from the direct tax base. A 30% tax on the remaining 60% of GDP should have brought in around 18% of GDP. However, the current direct tax-to-GDP ratio is 5.6%.

Experts termed the target aspirational. “It is a long term vision that needs a robust and calibrated plan to make it a reality,” said Mukesh Butani, founder, BMR Legal, a law firm that specialises in tax advisory.

Still, it is likely the target is directional, and even a marginal improvement will help increase India’s overall tax-to-GDP ratio. Including direct taxes and indirect taxes, this is currently 10.8% of GDP (excluding state taxes) but likely to increase because of the unified Goods and Services Tax introduced this year.

The broadening of the tax base will provide the leeway to cut tax rates, explained the first official. “You have to collect taxes from someone to give relief to someone else as public expenditure cannot be compromised.” In theory, lower tax rates and liberal tax slabs could also mean more compliance, resulting in a so-called virtuous cycle, meaning more people pay taxes. The finance ministry on 22 November set up a task force with Central Board of Direct Taxes member Arbind Modi as convener and chief economic advisor in the finance ministry Arvind Subramanaian as a special invitee to draft a new direct tax code in the light of global best practices and the economic needs of the country.