US tax reforms – time for India

US tax reforms should help us to make changes to India direct tax code

Yesterday President Donald Trump signed sweeping tax reforms impacting Individuals as well as Corporates. The tax cuts are significant with peak corporate tax reduced from 35% to 21% and Individual highest bracket from 39.6% to 37% (important changes in 7 buckets for different category of tax returnees). Reform also include changes in components like standard deduction, exemptions, and tax credits and so on.

On 20th Dec, Indian Income tax department released a report basis FY14-15 income tax returns. Only 4.1 Cr. (Population – 130 Cr.) has filed returns of which 2 Cr. has declared NIL taxable income, which is less than 1.5% of the population. And surprisingly (not really), less than 10,000 Indians have taxable income of over INR 1 Cr. (2000+ cars sold by Merc, Audi & BMW in first 5 months of current year!). The growth in taxpayer has not been any great averaging at about 50 Lacs annually for past 3 years (could be higher in current year due to demonetisation). And therefore Tax-GDP ratio is at 5.6%, compared to say US which is at about 26%.

After long-awaited indirect tax reform through launch of GST, it’s time to look at direct taxes. Fact remains that given a choice none of us would like to pay a dime to government and hence a large number of tax payers are salaried who have no choice but to comply (TDS means government has taken its cut before it reaches our pocket; traders are learning it now). Most of them try all the trick allowed like fake LTA, Medical bills, rental deduction and so on. Post demonetisation, GST roll-out and initiative to link Aaadhar means there is likelihood of increase in number of people falling under taxable income. To ensure that all these people, instead of trying to figure out a way to avoid paying tax (and filing NIL tax returns), willingly pay their share of burden towards government expenditure – There is urgent need to rationalise our tax structure. GST will help government to increase their indirect tax collection and with subsidy being rationalise, it’s only right to provide some relief to honest tax payers and add fence sitters, who would like to change colour of their money.

US tax reforms provides a good benchmark. If a country with such high per-capita income is willing to cut down rates, why not India. Direct tax reforms should include lowering tax, increasing tax-slabs, increasing standard deduction, doing away with exemptions and cess, simple filing etc. The rumour mill is buzzing with such an expected reforms being announced in current budget. Let’s do it now than waiting for 10 long years, as we have seen in GST – 10 years has not helped to implement any better.

 

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