Efforts to simplify India’s Income Tax Act

Source: The post efforts to simplify India’s Income Tax Act has been created, based on the article “How to reform India’s income tax law” published in “Indian express” on 3rd August 2024

UPSC Syllabus Topic: GS Paper3 – Indian Economy – mobilization of resources.

Context: The article discusses efforts to simplify India’s Income Tax Act, focusing on recent changes like reduced corporate tax rates and streamlined personal income tax slabs. It also mentions initiatives to increase tax compliance and reduce disputes, alongside proposed reforms to further improve the tax system.

For detailed information on Concerns related to India’s income tax system read this article here

What Efforts Have Been Made to Simplify India’s Income Tax Act?

1. Historical Context: In 1958, the Law Commission of India aimed to simplify the Income Tax Act of 1922.
2. Corporate Tax Reforms: The corporate tax rates were reduced, and incentives are being phased out under the new tax regime. For example, 58% of corporate taxpayers chose the new tax regime, lowering the effective tax rate from 29.49% in 2017-18 to 23.26% in 2021-22.
3. Personal Income Tax Slabs: The number of personal income tax slabs was reduced, and compliance was simplified, increasing taxpayers from 89.8 million in 2019-20 to 93.7 million in 2022-23.
4. Foreign Investment: The corporate tax rate on foreign companies was reduced to 35%, and the angel tax was abolished.
5. Dispute Resolution: The Vivad Se Vishwas scheme offers a way to settle long-standing disputes. Shortening reassessment periods and setting higher monetary thresholds for disputes also help reduce confrontations between taxpayers and the income tax department.

What Impact Have Tax Reforms Had on Revenue and GDP?

1. Direct Tax to GDP Ratio: Increased despite lower tax rates.
2. Corporate Tax Revenue: Effective tax rate reduced from 29.49% in 2017-18 to 23.26% in 2021-22.
3. Personal Income Tax: Simplification increased taxpayers from 89.8 million in 2019-20 to 93.7 million in 2022-23.
4. Capital Gains Tax: In the assessment year 2022-23, capital gains made up 11% of gross incomes reported in tax returns. Around 60% of long-term capital gains were above Rs 500 crore, and 40% were reported by corporates. A higher exemption limit of Rs 1.25 lakh on long-term gains benefits lower-income taxpayers.
5. Revenue Loss: Proposed direct tax changes cost Rs 29,000 crore, less than current exemptions and deductions.
6. Economic Growth: Nifty 50 delivered a 26.8% return, reflecting strong capital market performance.

What Are the Future Plans for the Income Tax Act?

1. Government’s Intent: The government has announced its intent to review the Income Tax Act.
2. Previous Simplification Efforts: Simplification has been attempted in the past but has not fully resolved the issues.
3. Redrafting Contentious Sections: To fundamentally resolve disputes, contentious sections of the Act need careful redrafting.
4. Six-Month Focus: It is hoped that the work over the next six months will help meet the stated objectives of the tax system review.

Question for practice:

Discuss the recent efforts and their impacts on simplifying India’s Income Tax Act.