Improve compliance – There have been numerous reports of how a small percentage of India’s population pays taxes. Below is how India’s tax collection vs GDP compares with other countries.
Tax as a % of GDP
For India is 17.7
For US is 26.9
For UK is 34.4
This reflects how our tax revenues may not have kept up with growth in GDP. Hopefully with recent digitisation drive and launch of GST, tax compliance is likely to go up. It will be interesting to watch how demonetisation impacts growth and spending. Higher bank balances can lead to higher spending, which can be inflationary in some circumstances.
Digitisation could pave the way for financial inclusion for lakhs of people. Around 80% of transactions in the US and nearly 90% of transactions in UK are cashless. So there is a huge potential for India, which can lead to wider compliance and growth in filing of tax returns.
Link tax deductions to inflation
During the budget season there are constant demands for raising of tax deductions. Some of the tax deductions have remained unchanged for nearly two decades. The government could consider adjusting these deductions to inflation and removing the ones which are redundant. This can be done for individual taxpayers. In the US personal tax deductions are inflation adjusted every year. While corporate tax rates could be linked to encouraging investment and flow of capital. Or tax free regime to encourage start-ups or specific sectors such as fintech.
Increase share of direct taxes in overall tax collections
The share of direct taxes in total collections has been seeing a downward trend. Since direct taxes play an important role in ensuring equality, they should form a larger portion of total tax collections. Indirect taxes are consumption based and impact everyone equally, India must focus on raising the share of direct taxes like the US and UK. This can be done with a play of tax rates (between direct and indirect taxes) and widening of base.
Reform Income tax department: Embrace technology
Government must continue its efforts to bring more people under the tax net. The tax department has gone digital in a big way. E-verification and e-notices were introduced in the recent past and this eases hardships taxpayers face during filing. We hope this eco-system will continue to evolve.
Excerpts from this were published in Business Insider here.