India's Tax System: Moderating Rates, Widening Base

New Delhi, Jun 13 (PTI) There is a need for a shift in the taxation mindset from rates to revenue by moderating tax rates and widening base in order to achieve the goal of 'Viksit Bharat' by 2047, experts said.

They underscored the need on transition from rates to revenue focused on lowering tax rates, enlarging the tax-paying base and thereby creating the means for financing of India's investment and development needs.

"Conventional higher tax rates haven't resulted in significant tax buoyancy. Recognising this fact, governments in India since 1991 onwards have clearly batted for moderate tax rates leading to greater levels of transparency and compliance," EY India senior partner Sudhir Kapadia said.

Time has come to bite the bullet for reforms in direct taxes, he said, adding, there could be one simplified rate structure for businesses and for individuals, there could be one simple three-rate structure with low or moderate rates, no surcharges and cesses and no significant deductions.

On GST, he said, a lot has been spoken about the rates and clearly it is time to have a far lower number of rates in GST structure.

"It is also time to ensure we do not have constraints related to availing of input tax credits. There has been a steady increase in income tax revenues but we need to have continued focus on taxpayer experience with tax administration, and ensure the filing process remains seamless and hassle-free," he added.

India's tax to GDP ratio suffers from the presence of a thriving informal sector, which still accounts for 30 per cent to 35 per cent of the economy, Kaushik Dutta, Director, Thought Arbitrage Research Institute, said at a seminar organised by Think Change Forum here.

"A simplified GST regime will enable them to join the formal economy, take input tax credits, and become competitive. Tax evasion continues to be a big challenge along with classification issues. The inverted duty structure is also an impediment. Another area that GST has not been able to crack is e-commerce. So, there are challenges and they need to be addressed," Dutta said.

According to Pulin B Nayak of Centre for Development Economics, "India is still in the group of developing economies. Income tax payers are less because of low per capita income. Putting tax rates at too high rates is also a bad idea as it will lead to tax evasion and people will wish to reduce their work effort at the margin."

Increasing tax to GDP ratio should very much be a priority because this will enable the government to spend on public goods, infrastructure, and the social sector, Nayak said.

"We need to widen the tax base, with the minimum of deductions and exemptions, and we need to maintain moderate rates. This is also suggested by the vast amount of theoretical research in the area of optimal income taxation that was pioneered by the late Nobel laureate James Mirrlees," he said.

Echoing similar views, Ranganath Tannir, general secretary, Think Change Forum, said reforms in taxation is the need of hour and government should consider lowering tax rates and increasing the base of taxpayers sooner than later.