Budget 2023: Arvind Panagariya says time to simplify personal income taxation system, end exemptions

Former Vice Chairman of Niti Aayog Arvind Panagariya

Ahead of the Union Budget 2023 scheduled to be presented on February 1, former Vice Chairman of Niti Aayog Arvind Panagariya expressed that it is time for the Finance Ministry to simplify the personal income taxation system and end exemptions.

In an exclusive interview with Moneycontrol, Panagariya suggested that the time is ripe for ending at least most of them, if not all, exemptions in personal income tax just as it has been done in the corporate tax.  "It doesn't matter if revenue is the issue, they (the central government) can start out with 4-5 tax rates."

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He suggested that the forthcoming Budget must try to overcome this and introduce a more effective exemption-free option with lower tax rates.

Currently, the basic income tax exemption limit is Rs 2.5 lakh for individual taxpayers under both the old and new income tax regimes.

Meanwhile, despite the global economic slowdown, the Indian economy has held steady. The country’s economy grew by 9.7 percent in the first half of 2022-23, which can boost the world's third-largest economy further in the coming years. However, economists, including Panagariya, have suggested that major reforms would be needed, one of which is the removal of tax exemptions in personal-income taxation.

Furthermore, in the interview, Panagariya also mentioned that India's current investment demand and consumption are very robust. "We have seen that the investment in proportion to GDP is rising for the last several quarters," he said, adding that he does not recommend the government raise more expenditure.

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Earlier, Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, also suggested that the upcoming Union Budget should incentivise taxpayers to move towards an exemption-less direct tax system. According to Debroy, the move would increase revenue, reduce compliance costs and litigation, and broaden the tax base.

“I think the big agenda on the direct tax side which is still pending is the removal of exemptions, both on the personal income tax side and the corporate side,” Debroy had said in an interview with Moneycontrol.

Finance Minister Nirmala Sitharaman is set to table the Union Budget for the financial year 2023-24 on February 1. This will be the last full Budget before the next election, thus a greater degree of populism is expected.