Hopes rise of lower tax rates in Budget

Finance minister Arun Jaitley has raised hopes of a more benign tax regime in his February 2017 Budget. This will not only make Indian goods and services more competitive globally, as he noted, but it would encourage more people to pay taxes and enable a lower taxation rate. Recently-released government data shows only 1.25 crore people, of a population of 123 crores, pay taxes in India. This is a sorry state of affairs as it means just one per cent pay income-tax. The government must seriously consider how the tax base can be widened. Mr Jaitley has begun the process of reducing corporate tax, including surcharge, to 25 per cent in phases, and it’s hoped he does it at one stroke. There’s no logic in this piecemeal approach. If the tax base is widened, lower taxes will follow. The corporate tax in China, India’s biggest competitor in exports, is 25 per cent, while in Singapore it’s just seven per cent. Several Indian firms have already relocated their headquarters to Singapore as taxes are lower, and there are fewer hassles with tax sleuths.

The current demonetisation programme, with the suddenly-delegitimised Rs 1,000 and Rs 500 notes having to be returned to banks in exchange for new notes, has already led to the discovery of hundreds of cases of tax evasion. Reports after November 8 suggest that the total undisclosed income admitted or detected till December 19 is over Rs 3,185 crores, and the income-tax department is already working on these cases. It’s good that a discussion on taxes was triggered by Prime Minister Narendra Modi when he said that those who make money from stock markets must give back. He has raised a hornet’s nest as it’s estimated taxes of around Rs 20,000 crores to Rs 25,000 crores are evaded through various loopholes in the market system.

This has put the stock market on edge: it points out it already pays a securities transaction tax every time a share is bought, and any more taxes would be like double taxation. The stock market pays the government between Rs 7,000 crores to Rs 12,000 crores in taxes depending on whether it’s a good year or a bad year. But it’s obvious the government will get much more if the financial jugglery is curbed. February 1, when the Budget is likely to be presented, may be very interesting as the government is expected to make amends for the pain that people have suffered after the demonetisation. On the personal tax front, India is among nations that have a lower rate of up to 35.54 per cent. But there’s a lot of scope to cut this further if the government wants to reignite the demand and supply process, that faced a setback after the demonetisation.