BackOpinion | Slash income tax to put cash in people’s hands
It may be time for the government to consider a consumption stimulus by lowering the burden on taxpayers. Parts of the proposed direct tax reforms could be front-loaded for this
PremiumRecent data sets have dampened expectations of an economic upturn in the near future. According to India’s Central Statistics Office, gross domestic product (GDP) growth slumped to just 5% in the three months ended June, sharply lower than the 8% logged a year earlier. Figures for car sales, industrial production, corporate earnings, machinery imports and consumer product purchases all point to a demand slowdown. To counter it, the government has announced a raft of measures, many of them aimed at upping sales and making more funds available. This is encouraging, but policymakers could also consider the benefits of putting extra money directly in the hands of taxpayers. Tax cuts are a standard form of fiscal stimulus in the West, and the idea could potentially work here as well. It would encourage beneficiaries to spend more, and, once demand picks up, investment by businesses could begin to revive. Simplify taxes, and it would also be in keeping with the direct tax reforms that the country needs to implement.
True, offering tax cuts can be risky in the context of the country’s state of public finances. Revenues have lagged projections and the government’s fiscal consolidation targets would look distinctly elusive if the giveaways are too large. Yet, given the gravity of the economic slowdown and the need to revise our bulky rulebook on taxation, a mid-year shift on this front could be worth a try. The exercise could begin with the long overdue simplification of our direct tax laws. Thankfully, an overhaul is already in the works, with everything from tax slabs and income assessment to processes and scrutiny systems up for revision. A panel looking into all direct taxes has recently submitted its report to the finance ministry. Among other things, it has reportedly recommended a cut in tax rates and the removal of various impositions that add to calculation complexity. Once the ministry examines the report, a draft law would be prepared, which will be circulated for discussion before a bill is placed in Parliament for approval. All this will take time.
For now, the government could make interventions that do not need new legislation. Tax rates for each slab of income, for example, could be lowered immediately. Multiple layers of levies can also be removed. Recently, the government withdrew a surcharge imposed through this year’s budget on the earnings of foreign investors. The same could be done for individuals in similar upper-end income brackets. Other than reviving spirits among the “super rich", such relief would also serve to reassure those who have been on the lookout to shift residence to countries with lighter tax regimes. In any case, it is hard to justify a tax system laden with extra levies on top of the regular slab-by-slab rates. It’s a basic canon of taxation that the share one owes the government should be easy to compute. Therefore, if the surcharge goes, so must the education cess, with funds needed for the sector drawn from the usual pool of budgetary allocations. Axing the standard deduction for those above the taxable limit will also ease the arithmetic of it. If accompanied by a sizeable drop in tax rates so that nobody is put at a disadvantage, people would only be glad for it. As for the revenue shortfall all this will result in, New Delhi has its bounty from the Reserve Bank of India to count on.
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