Counting tax returns: Efforts to widen the tax base have had sub-optimal results as income growth is slow | 1 August 2023 | UPSC Daily Editorial Analysis

What's the article about?

• It talks about the status of tax base in the Indian Economy.

Relevance:

• GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
• Essay;
• Prelims

Context:

• As per the government data, the income tax returns filed for the last financial year has risen.
• The number of taxpayers has risen at a faster pace in recent years, reflecting higher compliance—from 28.7 million for FY13 to 74 million for FY22.
• This trend shows that the tax base of India is widening.

What is meant by widening the Tax Base?

• Widening the tax base simply means increasing the volume of tax collection via different methods.
• Some of the most commonly used methods are decreasing the threshold of taxes. for example If, at present, only those people who pay taxes whose income is more than 2.5 lakhs, then the government can reduce the minimum salary required for tax payment to 1 lakh thus making more people pay taxes.
• Another method adopted by many economies is subjecting more products to taxes or increasing the tax percentage.

Analysis:

• Reforms done by Government to widen the country’s income tax assessee base:
  • Judicious use of a combination of technology, suasion, aggression and tact.
  • Moderation in tax rates (slabs restructuring)
  • greater ease of returns filing and processing
  • quicker dispute resolution,
  • Introduction of the Taxpayers’ Charter
  • Reductions in exemptions and deductions gradually
  • All these reforms resulted in rising tax compliance. However, the number of filers who claim nil tax liability also continues to rise—they were 56% for FY13, and 69% for FY22. Thus showing limited growth in the tax base.
• Reasons for India’s low tax base:
  • The primary reason is the low and stagnant income of the average Indian.
  • Tax exemption given by the government.

Way Forward:

• The government has been acting with the conviction that a benign and simple tax regime is the best bet for widening the taxpayer base and enhancing revenue productivity.
• In the process, it has even discarded the practice of using tax policy as an instrument to influence the savings and investment choices of people and companies, and refused to differentiate between asset classes, when it comes to taxing income.
• Curiously, the bold reorientation of tax policy is somewhat at variance with the overall strategy to spur investments, via production-linked incentives, cleaning up of banks’ balance sheets, deepening of the corporate bond markets, and an unprecedented push to public capex.