During the recent long drawn election campaign, Prime Minister Narendra Modi kept emphasizing that the country has only seen a ‘trailer’ and lots of transformative changes are on the anvil in the Indian economy in order to lay a strong foundation for Vikshit Bharat in 2047.
Interestingly, this was followed by President Murmu who in her first address to the joint session of Parliament after the election in June 2024, emphasized that the forthcoming Budget will announce historic steps and present ‘futuristic vision’ for growth. President further added, for good measure, that the pace of reforms will be further accelerated.
These ‘pre-Budget’ pronouncements at the senior most levels of leadership in Government has raised considerable expectations of far reaching and transformative proposals in the forthcoming Budget.
This article focusses on the revenue side and the likely transformative changes Government can consider in the area of direct taxation in the wake of key macroeconomic growth enablers.
Key macroeconomic growth enablers
Domestic savings and investment: There is a need to have a sustained nominal savings and investment rate of 31‑32% year-on-year till FY 2048 to have the ability to access the huge amount of long term funds needed to finance the ever growing needs in the economy.
Health and Education: The current levels of expenditure on health and education (1.2% and 2.6% of GDP, respectively, for FY 2023) need to be increased to 3% and 4% of GDP, respectively, to meaningfully reap the benefits of demographic dividend.
Government expenditure: Enhancing the size of government expenditure from its current level of about 29% of GDP (for FY 2023) to 35% will be required given the scale of ambition to grow the economy to the level of developed nations.
Fiscal discipline: Counter-intuitively, the current government debt – GDP ratio of about 82% (for FY 2023) needs to glide down to 60% as specified in the FRBMA, 2018. Thus, there will be constant pressure on Government to focus on ‘quality’ of expenditure with optimum outcomes, at the same time, improve the current tax-GDP ratio which has remained stubbornly low between 10-11% over the years (though there is directionally an uptick more recently which is very encouraging).
Rationalisation of corporate and business tax rates
Whilst considerable simplification in the design and structure of corporate and business taxation has been achieved in recent years, the existing tax structure is still beset by a plethora of ‘optional’ deductions and exemptions (under the legacy provisions governing corporate taxation) as well as myriad surcharges and cesses. As a first step, Government can consider further reduction of the ‘optional’ corporate tax rate from 22% to 20% and removal of surcharges and cesses in lieu of making this the ‘default’ provision thus eliminating the legacy scheme of various deductions and exemptions. Further, the computation of taxable income should be aligned with statutory audited accounts (except a few unique industry sectors) thus eliminating the need for various adjustments to statutory profits for the purpose of tax computation. This simplified scheme with the lower corporate tax rate of 20% will save government revenues currently foregone in various deductions and exemptions.
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Simultaneously, tax rates for partnership firms and limited liability partnerships (LLPs) should be reduced to 30% (after elimination of surcharge and cesses). These measure will further increase tax buoyancy and higher tax collections as already borne out by the ever increasing amount of corporate income tax (CIT) collections from just under Rs 4 lakh crore in 2014 to over Rs 9 lakh crore in 2024.
Simplified Personal Income Tax (PIT) regime
Government should consider completely moving to the new regime of PIT with minimum deductions. However, to make up for the loss of various deductions available in the legacy scheme, the maximum income slab rate (for the rate of 30% to be applicable) could be increased from Rs 15 lakh to Rs 30 lakh with corresponding reduction in rates at the lower income slabs. These changes will propel even greater tax buoyancy in PIT revenues besides considerably simplifying tax compliance for individual taxpayers. It is noteworthy that there has been a steady increase in PIT revenues from just under Rs 2.50 lakh crore in 2014 to over Rs 10 lakh crore in 2024 which should comfort the Government that moderate and simple tax structure leads to greater tax buoyancy.
Focus on positive taxpayer experience with tax administration
Whilst considerable improvement has been seen in tax administration enabled by digitization in recent years, there are still a few areas where more steps need to be undertaken as follows:
# Technology interface between jurisdictional tax officer (JAO) and Central Processing Centre (CPC) needs to be enhanced and the current backlog of orders giving appeal effects and refunds needs to be cleared at accelerated pace.
# Unclog cases pending at Commissioner of Appeals, which at last count, exceed 5 lakhs. This phenomenon has been an unintended and undesirable outcome of the faceless assessment scheme and needs redressal on a war footing to smoothen the flow of appeals to the tax tribunals.
# Government should consider setting up senior ‘Relationship officers’ to facilitate assessment and post assessment matters for the top taxpayers in the country. This will incentivize taxpayers to proactively connect with tax authorities and reduce disputes and litigation.
All in all, it is hoped that Government will seize this opportunity to introduce bold and transformative measures in the forthcoming Budget to be in sync with the vision of a Viksit Bharat by 2047.
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