Going formal: How the government is trying to widen India's tax base

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Hoping to widen India's tax base, the government is looking to encourage businesses in the informal sector to shift to the formal sector with a variety of tax measures.

The informal sector accounts for almost half the country's GDP output.

With Finance Bill which was passed by the Lok Sabha on Wednesday, the income tax levied on the Micro Small and Medium Enterprises' (MSME) - or companies with an income of less than Rs 50 crore will come down to 25 percent from the current 30 percent starting April 1.

This will not only strengthen the MSME sector, but also act as an incentive for  informal organisations to make a shift to the formal sector.

"Government is constantly pestered to spend more for the farmers, the MGNREGA , irrigation, defense. But how does the government increase spending when India remain a largely tax non-compliant society," said Finance Minister Arun Jaitley in a Lok Sabha address on Wednesday.

However, the problem also lies in the significant chunk of our country's workforce being employed in the unorganised sector. According to National Sample Survey Office (NSSO) statistics from 2011-12, around 72 percent of India's workforce was in the informal sector.

While income tax on individuals earning less than Rs 2.5 lakh per annum is nil, the government has also halved the tax on workers with an annual income of less than Rs 5 lakh.

"By decreasing the tax charged on an individual, we want to encourage them to be a part of the tax net," said Jaitley.

Apart from taxes, the government is also trying to put an end to the informal sector by promoting cashless transactions and digitisation. With the Finance Bill, it puts a cap on the value of a single cash transaction to Rs 2 lakh.

The government's less-cash drive led to the opening of 27 crore savings bank accounts under the Jan Dhan Yojana, with deposits worth Rs 63,800 crore.

Union Minister JP Nadda, too, had recently stated that over 80 percent of economic activity in the informal sector will soon be shifted the the formal sector.

The Goods and Services Tax, which is set to be implemented by July 1, will also facilitate the country's shift away from the parallel economy,