Changing the rules to an exemption-free income tax regime would be a bad policy: Montek Singh Ahluwalia

India should not immediately seek to move completely to an exemption-free personal income tax regime as that would create an impression that the fiscal authority can do “whatever it likes, whenever it likes,” according to Montek Singh Ahluwalia.

Ahluwalia, the former deputy chairman of the erstwhile planning commission, agrees that getting rid of exemptions is a good thing but cautions that sudden policy moves won’t be a good idea.

“The problem is we had earlier said that you can stay with this system and keep the exemptions or move to a new system (without exemptions). So, if you are saying we now change the rules on that… that’s a bad policy in my view because it creates the assumption that the fiscal system can do whatever it likes, whenever it likes,” Ahluwalia told Moneycontrol in an interview.

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Ahead of the 2023 budget there has been a chorus of voices seeking tweaks to the direct tax system, including a few suggestions on doing away with exemptions.

The government in fiscal year 2020-21 introduced an exemption free personal income tax regime with lower tax rates. However, taxpayers were given the option of staying with the older tax regime under which they can continue to avail exemptions.

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Bibek Debroy, the chairman of the Prime Minister’s Economic Advisory Council had earlier in 2022, speaking as an economist, suggested that exemptions must be removed from India's tax regimes, especially direct taxes.

India must at some point agree to move to a completely exemption-less system, Debroy had said.

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"We must be willing to pay higher taxes or we must be willing to settle for reduced delivery of public goods and services," Debroy had said.

"Today, on the personal income tax side and on the corporate tax side, there is a scheme, not mandatory, of opting for an exemption-less regime. In my view, and this is not an official view, this is like jumping a ditch. You cannot jump a little bit of the ditch and hope to jump the rest of the ditch," he had added.