Tax reforms can help revive the economy | The Hindu Business Line

Context: During the third quarter of Financial Year 2019-2020, GDP growth in India decreased to 4.5%, and India is going through an economic slowdown.

Background:

• In September 2019, the government has announced a lowering of the corporate tax rate from 30% to 22%.
• Despite showing an increase of 8.4% in October 2018, the Index of Industrial Production (IIP) declined by 3.8% in October 2019.
• In October 2019, manufacturing, mining and electricity consumption also showed negative growth.
• In January 2020, government revenue from direct tax collection declined by 5.2% from last year.

Reasons for the slowdown: 

Incorrect tax policy:

• Though GST was brought for reducing complications in taxes, the problems related to taxes in India did not end as GST lacked innovative ways to prevent tax evasion.
• Tax evasion still continues to be a problem in India. Department of Revenue has recently found 931 fraudulent cases of GST refund since 2017. It decided to scrutinize all refund claims made under GST. After the recent introduction of FASTags, revenue collection from Highways has increased significantly. This also indicates towards the problem of tax evasion.
• Invoice matching has been made a part of GST to prevent the fraudulent transfer of Input Tax Credit (ITC). This needs to be implemented urgently and quickly.

Impact of incorrect tax policy on automotive sector: The range of GST rates on cars and two-wheelers is 12% to 28%. But, 28% GST is applied to most personal and commercial vehicles. Along With GST, Government also imposes compensation cess of maximum 22%, RTO tax, road tax, registration fees, etc. This makes the cost of a vehicle for a consumer high.

Impact of incorrect tax policy on real estate sector:  In real estate sector, the main taxes that are imposed on a home-buyer are GST, stamp duty, registration, TDS, annual property tax. Multiple taxes increase cost of buying a house by ₹12-15 lakh. Currently, Indian cities have an unsold housing inventory that would be enough for four years without the construction of new houses. Due to large unsold inventory, people do not want to invest in real estate, and this has caused slowdown in the real estate sector.

Steps needed to increase tax revenue:

Increase the tax base:

• Number of people who paid tax in 2018-19 was 8.45 crore out of 1.35 billion people. Currently, agricultural income is not taxable in India. So, approximately 58 % of people are exempted from tax.
• Exemptions on agricultural income are justifiable as farmers are dependent on nature for income. The cost of inputs in agriculture is increasing. The land holding size of farmers is declining.
• As per the agriculture ministry data, nearly 86.21 % of total land holdings in India fall into the category of small and marginal holdings (less than 2 hectares). The final results of tenth agricultural census for 2015-16 were recently released in August 2019. It showed that the number of small and marginal land holdings in 2015-16 has also increased from 2010-11.
• All farmers should not be given exemption from tax on agricultural income. Farmers having more than ₹10 lakh income from agriculture should not be given exemption. This will solve the problem of reporting of income as agricultural income and widen taxpayer base.
• Agriculture subsidies like fertilizers and seeds should be transferred directly to the targeted beneficiaries.

Remove the leakages in imports: Government needs to remove leakages in imports to increase revenue. Currently, imports are understated to avoid duties. This has cascading effect on taxes and impacts GST revenue. Government tried to remove leakages through demonetisation. But, it requires the use of technology and big data analysis of doubtful transactions without affecting honest business transactions.

Way forward:

In order to collect more revenue, the government should bring uniform moderate taxation above a certain income limit and remove leakages by employing technology. Uniform moderate taxation will lead to more income at the hands of consumer. This will increase consumption and prevent slowdown of economy.