Income tax overhaul is a good idea, but wait for GST to stabilise, demonetisation impact to wane
It would be prudent for the government, therefore, to wait for the effects of demonetisation to wane and the GST system to stabilise. In fact, the success of any overhaul of the direct tax system will be tied to the success of GST in delivering a truly “good and simple tax.”
India needs a modern income tax law that is easy to enforce, fair to all and relevant to the current economic context. The Income Tax Act of 1961 has become somewhat outdated, and complicated with amendments and modifications introduced over the years. If recent media reports that the government is planning to rewrite the income tax law are true, it shall be considered a welcome development. It is, however, imperative to ask if this the right time to contemplate such a move and what should be the principles guiding any changes to the income tax system.
This is not the first time an overhaul of India’s direct tax regime is proposed. In the late 1990s, the Planning Commission set up a taskforce to review the income tax system and a comprehensive report was presented to the government. Years later, another high-level panel under Vijay Kelkar, who was then adviser to the finance ministry in the government of Prime Minister Atal Bihari Vajpayee, suggested several radical measures to reform the tax system. Not much action followed either of the reports. In 2009, when Manmohan Singh was the prime minister, the UPA government proposed a Direct Taxes Code that would sharply cut tax rates, remove exemptions and offer a transparent and predictable income tax regime. The plan, however, failed to take off.
On all of these occasions, the governments of the day backed out because the Indian economy wasn’t doing well, or had begun to turn slippery. If the economy is not in a healthy state, governments will always find it difficult to commit to tax reforms for the fear of revenue loss and political backlash. The context to the latest talk on a new income tax law is no different. The Indian economy lies in a precarious state, struggling to overcome the impact of demonetisation and the new goods and services tax, which came within a year of each other and have caused widespread disruptions.
It would be prudent for the government, therefore, to wait for the effects of demonetisation to wane and the GST system to stabilise. In fact, the success of any overhaul of the direct tax system will be tied to the success of GST in delivering a truly “good and simple tax.” If the government succeeds in quickly eliminating the anomalies and the short-term pains of GST, keeps it from fuelling inflation and reduces the number of slabs and rates by the time the next budget is due, there will be a stronger vote of confidence for any taxation reforms in the future.
That said, it is also important to be clear on how we set the objectives and define the principles for an overhaul of the income tax system. Simplifying the tax structure or reducing the rates should not be mistaken as objectives. At best, these could be the means to achieving a broader objective that must focus on ensuring fair play and striking a balance between the varied, and often, conflicting interests of different income classes.
A major drawback of the current income tax regime is that it places a relatively higher burden on the middle class, especially the salaried, compared to other sections of the society. For the contribution they make to the state exchequer every year, they get very little in return. In a country where corporates enjoy big tax breaks, farmers are offered loan waivers and populist doles are routinely handed to the poor, the middle class feels increasingly ignored and marginalised.
For an economy such as India’s to stay vibrant, it is important to bear in mind that the middle class needs to sustain the conditions for its economic status – through access to quality education, better employment opportunities and an environment that assures its next generation would be better off.
It is time the government paid attention to the interests of this aspirational class. The proposed overhaul of the income tax regime could be an opportunity to do just that.
Rajesh Mahapatra is the chief content officer, Hindustan Times.
Follow the author at @rajeshmahapatra
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