News ID: 264815
Published: 0835 GMT January 25, 2020

Why tax cut won't fix India's bruised economy

Why tax cut won't fix India's bruised economy

By Ram Singh*

As budget day 2020 draws near, India’s clamor for a cut in income-tax rates is growing louder. Several commentators have joined the chorus for reducing income tax that, they argue, would boost consumption, eradicate both tax evasion, and expand the tax base and collection. Such beliefs are misplaced and mistimed.

True, there is a case for doing away with the dividend distribution tax (DDT) and reducing tax rates for low-income groups, but this should  be done at a future date, say two years down the line.

The budget is an opportunity for the finance minister to make credible promises in this regard. It will be a mistake to reduce tax rates when the tax revenue is well below the target, the fiscal deficit (on and off balance-sheet) is high and a weak demand is holding back growth.

The effect of income-tax cuts on demand will be limited, as it will benefit a small proportion of the population, less than five percent of the adult population, who would spend a fraction of the gains from the tax cut. Instead, the Center should use the tax proceeds to spend on infrastructure and schemes that will directly boost demand.

In fact, the budget could boost collection by expanding the tax base and increasing compliance. Taxpayers can be rewarded in future for their past contributions. For example, individual taxpayers can be promised a kind of ‘tax-funded insurance’ to meet eventualities like medical and job-related exigencies.

Similarly, there can be schemes for corporates and businesses for events like bankruptcy. To prevent misuse and moral hazard, the entitlements can be for a limited number of events, say, one or two. The claims can be restricted to a small fraction of the total tax paid by the taxpayer till the event. Several countries have productively used schemes in which taxpayers are randomly chosen for financial rewards.

It is important to reduce the uncertainty faced by taxpayers regarding tax rules and their interpretation by the income-tax department (ITD).

Removing human interface at the first stages of assessment is a welcome step. But for technology to be a solution rather than a problem, it requires changes in the functioning of the ITD, which are not easy to come by. Consider, for instance, the ‘notices for adjustment’ issued at the first stage of assessment based only on the mismatches between the details furnished by the assessee and those in form AS 26. In many cases, the demands remain unrectified even after repeated attempts by the assessee to explain the mismatches with relevant evidence.

Many taxpayers have to pay different taxes in their different capacities, e.g., as partners and co-owners, in addition to their individual capacity. Also, the tax deducted at source (TDS) has to be adjusted across different assessment years.

However, the present system is not equipped to correctly account for the various kinds of taxes paid by taxpayers at different points. The result is a multitude of technical glitches that take forever to resolve. The assessee suffers in the process. If these issues are not addressed immediately, the new technology-driven administration may end up causing disruption at a scale comparable to the disorder brought by the goods and services tax (GST).

To reduce litigation, there is need for an administrative forum to settle the disputes after the appeal has been processed by the income-tax commissioner.


* Ram Singh is a professor in Delhi School of Economics.

The article was published in The Economic Times.


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