17 Dec

Increasing Direct Tax Base

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Contents

• What is Direct Tax?
• Why is it important to increase the Direct Tax Base?
• Key Reasons for recent increase in tax base

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What is Direct Tax?

• Direct taxes are those taxes where impact and incidence lie on the same point (i.e. the burden for the tax falls on the entity that is being taxed). These taxes are generally progressive in nature and are highly elastic.
• Because the direct taxes are progressive, they bring equity in society (which doesn’t happen with indirect taxes). Therefore, the direct taxes need to be monitored carefully.

Direct Tax in FY23:

• India’s net direct tax collection has risen by 17.63% in 2022-23 to touch Rs 16.61 lakh crores, as per the data released by Finance Ministry in April 2023.
• • It was 14.09 lakh crore in FY22 and 9.41 lakh crores in FY21.
• Corporate Tax – Rs 10.04 lakh crores (51.1% of direct tax) and Personal Income Tax and Securities Transaction Tax accounted for Rs 9.61 lakh crores (48.9% of direct tax)

Current Tax Base:

• Less than 6% of the population has filed ITR in FY23. Only 7.4 crore / 140 crore population have filed ITR in FY23.

Why is it important to increase the Direct Tax Base?

• Boost Economic Growth: More Resources with government will let better implementation of various infrastructure and social projects.
• Fights Inequality: Indirect tax are regressive, but direct taxes are progressive and thus promote equality. Direction taxes also avoid severe distortionary trend of indirect taxes.
• Educative Value: Direct tax creates a civic sense among taxpayers. Because money is directly paid by citizens, they become more vigilant of where and how government is spending their money.
• Anti-Inflationary: Direct Tax can be considered a good instrument of anti-inflationary fiscal policy.
• Reduce pressure on honest taxpayers.

Key Reasons for recent increase in tax base

i. Cross Seeding of PAN with Bank Accounts and Linking PAN with Aadhar.

ii. Introduction of new data sources in the Statement of Financial Transaction (SFT), such as dividend, interest, details of shares etc has led to jump in reported information, with additional information of about 3 crore persons.

iii. Expansion of the scope of TDS/TCS: Several new transactions were brought under the ambit of TDS and TCS.

iv. Simplified process through technology:

• Faceless assessment Scheme is one of the biggest direct tax reforms in India based on key principle of Efficiency, Transparency and Accountability.
• Simplified ITR filing process through a 1-page SAHAJ return process for individual income tax.
• Ease of getting refund, majorly by small and medium taxpayers have also encouragement more filing of ITRs.

v. Steps towards formalization of economy

vi. Steps to expand digital payment system

vii. Streamlining of GST system

The above growth is still not good enough and the tax base is very low (only 7.4 crore people filing FIR)

Key factors for low tax base

i. Complex Law

• Income Tax Act 1961 isn’t suitable for current scenarios. It has become very complex and has thus reduced compliance.
• This complicated structure is difficult to understand for individuals/corporate sector. Plethora of exemptions and deductions, adding to litigation on these, needs to be removed.
• High compliance cost

ii. High Rates are recipe for low tax compliance.

• Personal income tax rates are very high leading to high rates of evasion.

iii. Poor Tax Administration

• A lot of tax evaders go scot-free.
• Income Tax department doesn’t have resources to deal with small tax evaders
• Corruption is rampant in income tax department.
• Complaints of harassment by tax officials.

iv. Large Informal Sector
v. Agriculture-out of tax net (sometimes non-agri income is also presented as agri-income)

Way Forward

• Simplified Direct Tax Law – A Direct Tax Code (DTC) has been envisaged for long.
• A direct tax council on lines of GST Council
  • To periodically update the tax rates and other provisions
•  Increasing Compliance
  • Reducing tax rates for personal income tax as well
  • Simplifying tax filing (for e.g. recent proposal by CBDT to merge 6 ITR methods into 1 is a step in right direction)
  • Increased resources with income tax department to even prevent evasion from among small players.
• Focusing on Behavioural Change
  • Employ social norms in encouraging the individuals to pay taxes. Countries like UK, Norway, Guatemala to name a few have successfully used the social pressure to increase the tax compliance.
  • CBDT campaigns can focus on salience of taxes in providing public goods.
  • Incentivize honest taxpayers – For e.g., by determining the amount of pension on the basis of individua’s tax contribution.
• Enhance use of new technologies like AI and ML to identify tax evaders.
• Bring Agriculture Income under Tax regime.

Conclusion

• Higher direct tax collection could lower the tax burden on the poor by creating fiscal space for reduction in GST rates.
• Therefore, it is important that government keeps working towards increasing the share of direct taxes in overall tax collection and increasing the tax base.

Example Questions

Discuss the key changes in the Corporate Income Tax brought by the Taxation Law (amendment)
Act, 2019. How far will it be effective in reviving economic growth in India. [15 marks, 250 words]