Concerns related to India’s income tax system – Wanted: An income tax system for India that’s fairer and simpler

Source: The post concerns related to India’s income tax system has been created, based on the article “Wanted: An income tax system for India that’s fairer and simpler” published in “Live mint” on 31st January 2024.

UPSC Syllabus Topic: GS Paper 3 – Indian Economy – mobilization of resources.

News: The article discusses the need for reforms in India’s income tax system. It focuses on introducing deductions for term insurance policies, simplifying capital gains tax, and addressing the comparatively lower tax burden on corporations than on personal income.

What are the major concerns related to India’s income tax system?

Low Term Insurance Uptake: Indians predominantly buy investment-oriented insurance rather than term insurance, leading to insufficient life cover in emergencies.

Complex Capital Gains Taxation: The system is complicated, with different rates and rules for various investments. For example, debt mutual funds are taxed at the marginal rate regardless of the holding period, while equity mutual funds and stocks have a 15% tax if sold within a year and 10% after a year. Physical gold, gold ETFs, and sovereign gold bonds each have different tax treatments, adding to the complexity.

Residential Real Estate Taxation: Capital gains from residential real estate are taxed at a marginal rate if sold within two years of purchase, and at 20% with indexation benefits if sold after two years. This adds another layer of complexity to the taxation system.

Unequal Tax Burden: Personal income tax collection grew from 2.1% of GDP in 2007-08 to an expected 2.98% in 2023-24, while corporate tax collection decreased from 3.94% to an expected 3.06% in the same period. This discrepancy is partly due to a

corporate tax rate cut in 2019, leading to a situation where corporate profits increased significantly (143% increase for around 35,000 companies from 2018-19 to 2021-22), but tax provisions grew only modestly (39%). This suggests a higher tax burden on individuals compared to corporations.

What should be done?

Enhanced Deduction for Term Insurance: Implement an additional deduction for term insurance premiums, suggesting a range between ₹10,000 to ₹20,000. This would be over and above the existing ₹150,000 deduction under Section 80C, encouraging more individuals to opt for term insurance.

Streamline Capital Gains Taxation: Simplify the taxation of capital gains by unifying the tax rates and rules for various investments like debt mutual funds, stocks, equity mutual funds, and gold. This simplification will reduce complexity and potentially benefit a wider range of investors.

Reassess Corporate Taxation: Given the decline in corporate tax collection (from 3.94% of GDP in 2007-08 to an expected 3.06% in 2023-24) and the significant rise in corporate profits with modest tax provision increase, reevaluating corporate tax rates may be necessary to ensure a more equitable tax system.

Question for practice:

Discuss the major concerns and proposed reforms related to India’s income tax system.