Tax reforms can help revive the economy (The Hindu)

Mains Paper 3 : Economy
Prelims level : Fastag
Mains level : Tax reforms significance for economic revival

Context:

• Indian GDP growth has slowed to a six-year low of 4.5 per cent in the July-September quarter, and leading indicators like imports and exports, capital goods and electricity consumption show signs of a severe economic slowdown.
• The crises in the banking sector, compounded by the slowdown in other key sectors, calls for serious introspection and corrective measures.

Tax structure to blame

• The GST still remains the best and boldest step taken by the government in recent years. Its implementation, in hindsight, could have been better, as the legislation did not take into account the innovative ways that rogue taxpayers can find to cheat on taxes.
• The recent spurt in revenue with the introduction of FASTags in the national highway system only goes to show the continued high instance of tax evasion in the system.
• Invoice matching is long overdue, and needs to be implemented on a war footing to curb GST leakages.
• On the other hand, increasing GST rates — as some people are suggesting — will be a recipe for further disaster in a negative economic environment.
• The GST on cars and two-wheelers in India is applicable between 12 per cent and 28 per cent, though the latter is the prevalent rate on most personal and commercial vehicles.
• However, the GST is not the only tax applicable, as a compensation cess of up to 22 per cent is levied on certain segments in addition to the 28 per cent rate. Add to this the RTO tax, road tax, registration fees. etc.
• The total tax incidence on cars after GST introduction can be as high as 50 per cent.
• This implies that for a vehicle with an ex-factory price of ₹5 lakh, the consumer is shelling out at least ₹10 lakh, if not more.
• In the real estate sector, a home-buyer is subjected to multiple taxes, including GST, stamp duty, registration, TDS, etc,, as well as the additional recurring annual property tax and corruption costs.
• Also, when one intends to capitalise the investment in real estate, there is imposition of an income tax, capital gain tax, etc.
• On a house worth ₹50 lakh, the home-buyer must pay an additional ₹12-15 lakh in the form of various taxes.

Widen scope:

• Over the years, governments have focussed on increasing tax revenues only through the existing taxpayers.
• It is also imperative to focus on widening the scope of taxpayers. In a country with a population of over 1.35 billion people, there were only around 8.45 crore taxpayers in 2018-19.
• A large section of India’s population (nearly 58 per cent) which is associated with agriculture enjoys exemption of tax from agricultural income.
• Agriculture has been portrayed as a troubled sector for a variety of reasons.
• Dependency on natural resources, declining land holdings, cost of production and cartelisation of produce purchase are some of the factors impacting the sector and overall livelihood of farmers.

Need to introduce agricultural income tax:

• Nearly 70 crore people are non-taxable. The government should decide on a threshold for agriculture income and bring it under the tax regime.
• It suggested that agricultural income of over ₹10 lakh should be made taxable.
• In addition, all agriculture owners with income above a certain threshold should file returns like salaried payers.
• This will significantly decrease leakages coming from over-reporting of agriculture income as well as widen the taxpayer base.
• All agriculture subsidies like fertilisers and seeds need to move to a direct benefit transfer system rather than the current highly inefficient and corrupt system with distortions at every level.
• The over-burdening of taxes on a select few has eventually decelerated consumption, leading to the slowdown in the economy, job creation and new investments.

Plug leakages:

• Another major area to focus on to increase revenue is the curbing of widespread leakages in imports.
• Consumption figures in India are grossly under-reported, as import values are understated to avoid duties. This has a cascading effect as it impacts GST revenues when these goods flow through the distribution channel in India. This large-scale evasion of import duties, mostly on traded consumer goods coming through China and the Middle East, needs to be plugged to increase tax revenues and protect the domestic industry which is playing by the rules.
• Demonetisation was an attempt to plug the leakages from the parallel economy but this has not been able to dent the widespread evasion in under-reporting of import values in certain sectors.
• The government needs to use modern technology tools and big data analysis, which can detect evasion without being obtrusive or hurting genuine business transactions.

Way forward:

• If the government wants to increase revenue, they should have a near uniform moderate taxation for all categories of citizens above a certain income and minimise leakages through the use of technology.
• This will lead to higher disposable income for the honest taxpayer, leading to higher consumption and an improved economy.
• Unless the minority taxpayers are not unburdened with taxes, the GDP and the economy will continue to report slowdowns quarter after quarter.

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Prelims Questions:

Q.1) With reference to the World Economic Forum (WEF), consider the following statements:
1. Its headquarters is located at Davos is Switzerland.
2. It publishes Global Gender Gap Report.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: B
Mains Questions:
Q.1) To what extent India requires tax reform for economic revival. Comment.