Revitalising India’s Tax System

Session Report
Samprikta Banerjee

A One-Month Immersive Online Intermediate Certificate Training Course and Online International Autumn School Program on, Contours of the Public Policy in India in the Amrit Kaal was conducted by the Center for the Study of Finance and Economics (CSFE), IMPRI, Impact and Policy Research Institute, New Delhi from September 1 to September 30, 2023.

On Day 5, there were three speaker sessions lined up, the third one being Reforming India’s Personal and Corporate Income Tax by Prof M. Govinda Rao, Distinguished Economist, Former Member of the 14th Finance Commission & the Economic Advisory Council to the Prime Minister. Former Director of the National Institute of Public Finance and Policy (NIPFP), New Delhi and Institute for Social and Economic Change (ISEC), Bengaluru. 

He began his discussion with a presentation that included topics like what makes a good tax system, the evolution of the Indian tax system, trends in tax revenue and recent reforms.

What Makes a Good Tax System?

He started by stating that although taxes matter, they entail disincentives. Hence, the best practice for tax reforms has certain characteristics like broadening the tax base, reducing the rate and rate difference, avoiding multiple studies to evolve a simple tax system, fairness in taxation should consider the tax system as a whole and not individual taxation, shifting focus to poverty alleviation, building an effective and friendly taxpayers service and ensuring proper coordination in tax reforms among different levels of government.

Evolution of the Indian Tax System

He then mentioned briefly and painted a picture of how India’s tax history ensued in the form of major tax reforms taken up over the years that built India’s tax system starting from the Kaldor Committee, Expenditure Tax in 1953 and going up to the Tax Information Network (TIN), 2004. 

The evolution of personal income tax had a long journey too finally focusing on equity and confiscatory rates. It started evolving around 1973-74 with 11 tax rates from 10% to 85% with a 15% surcharge, then the major reform in 1985-86 reducing the number of tax rates from 8 to 4 and marginal tax rates from 60% to 50%, Reduction in wealth tax rates in the reforms of 1991-92 and finally in 1996-97, where 3 tax rates finally decided upon, 10%, 20% and 30% with a cess of 4%.

Trends in Tax Revenue and Recent Reforms

These reforms are the precursor of the tax system that we see today and have major contributions in building the base for effective development in this area. The present tax structure has no tax for an income of up to Rs 2.5 lakh, 5% for people in the bracket of 2.5 to 5 lakh of income, 20% for the ones earning Rs 5 – 10 lakh and 30% for people having incomes above that. Moreover, there is a surcharge for incomes of over Rs 50 lakhs of 10% and a cess of 4% for all with exemptions available. However, an alternative tax system evolved with 7 stages of tax collection for seven ranges of incomes earned by the people of India.

He also highlights the problem with the Indian Tax System and that is basically the over-expectation from the system in the sense that it is entitled to help savings and investments, encourage small-scale industries, support SECs, encourage infrastructure industries, and others making it loaded with several objectives with creates numerous bottlenecks. Moreover, Agricultural income is not taxable income. Therefore, in the new tax structure, there are incentives for savings, insurance, and available housing directions.

The problem he feels is there with the tax system is the burden of being multifaceted in nature and performing several duties as they are meant to raise revenue and that should be the only function as loading too many objectives into tax policy results in a reduction of revenue by evasion and avoidance of the tax altogether.

Hence, he feels that the government should get rid of all these exemptions and have a simple 3-rate structure rather than 7 rates. He feels that the problems with the Indian tax system include stagnancy in personal and corporate tax revenues after 2007-08, an exemption to agricultural tax, more deductions and exemptions accruing to multiple objectives mandated to be achieved by the tax system, base erosion and profit shifting and tax administration issues.

He then highlighted and touched upon the major reforms in the evolution of corporate taxes starting from 1993-94 and going up to 2020-21 along with depicting a trend in the tax-to-GDP ratio in India over the years.

Focusing on recent reforms in the system, he touched upon the aspects of making personal tax and corporate tax optional in the new system. For personal tax, people can get a rebate of up to Rs 7 lakhs, with concessions and deductions disallowed and rates have been brought down for incomes below Rs 15 lakhs. In the case of corporate tax, they need to forgo exemptions with no allowance for incentives, depreciation and investment allowance.

Conclusion

With this, he came to the end of his session where he stated that although the tax system has undergone significant changes over time, there is a need for enacting the new code. He also expressed concerns regarding the fact that taxing of multinationals and digital taxation will continue to pose challenges by becoming a race between the tax collector and well-funded taxpayers. He believes that providing options is not the right solution and government should enact a new code by removing the exemptions and preferences. He highlights the necessity of using technology in the system and making taxpayer service effective to foster betterment in the taxing system in India.

His session ended with an interactive Q&A which engaged the audience and helped strike a fruitful conversation with the speaker regarding pressing issues related to taxation. 

Acknowledgement: Samprikta Banerjee is a research intern at IMPRI.

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