A less taxing state

News: India has had a very high rate of tax litigation. Therefore, Government has recently announced that the overarching aim of direct tax policy reform is to move towards a simpler regime, without exemptions and low rates.  

What has been the status of tax litigation in the country? 

In 2014-15, about Rs 2.1 lakh crore had been under dispute for a duration between one and two years. By 2020-21, it had increased more than threefold to Rs 6.6 lakh crore. This also limits the tax collection. 

How a simpler tax regime for corporate tax is helpful? 

Sovereign governments face limitations in setting tax rates on companies because capital is mobile. Therefore, a shift to a simpler tax regime will reduce the incidence of litigation and, thereby, attract more investment.  

How personal income tax can be made more appropriate as per the current economic situation? 

Around 75% of the returns filed are for income below Rs 5 lakh. Therefore it is important to reform this aspect of revenue collection as well. 

The current threshold for tax, which is Rs 2.5 lakh, needs to be indexed to inflation. The current floor has been in place since July 2014. Inflation has effectively lowered the tax threshold over succeeding years. Linking it with inflation makes it fairer. 

Also there is a need to decide a timeline when everyone can be moved to a regime without exemptions except the retirement savings, and also the process of filing returns should be made more simple.  

Source: This post is based on the article “A less taxing state” published in Times of India on 4th Feb 2022.