Taxation scheme is used by the government to encourage or discourage certain economic decisions. Here are few examples like reduction in taxable personal income by the amount paid as interest on home loans results in greater construction activity thus developing the infrastructure of the economy and generating more job opportunities which leads to the overall growth of the economy.
Tax base, tax rate, proportional, regressive and progressive tax policy affects the tax structure of the economy. List below are some suggestions to make tax structure best from the world:
#1 Inflation linked tax deductions from tax
Today constantly demand is increasing day by day from raising of tax deductions in the financial budget season. There are many tax deductions which remained unchanged from the past few decades, so that is why now it becomes necessary for the government to adjust these deductions to inflation and also to remove some of the deductions which are useless or redundant. For example in the US personal tax deductions are inflation adjusted every year, as it is beneficial for the individual tax payers. The corporate tax rates could be linked for encouraging people to invest and flow of capital. It should be encouraged to take start-ups in some specific sectors which are tax-free like Fintech etc.
#2 Encourage people to pay tax by using technology:
The use of technology in the tax system can increase the number of tax payers by reducing the complexity of the manual system of paying tax. It becomes compulsion for the government to continue its efforts to bring more and more people under the tax net because recently it has been noticed that many people perform malpractices to save themselves from the paying the tax. The initiative/ step taken by the government in the past few months to make the India digital is very commendable. Technique or system introduced like e-verification and e-notices makes it very easy for the tax payers during filing. Many new hopes have been generated from this new eco-system, that it will help our structure world class.
#3 Increase in the share of direct taxes:
India’s tax structure can be made world class by increasing the share of direct tax i.e. Income tax in the overall tax collection of the economy. Direct taxes are very important and play an important role in ensuring equality. In total collection of tax there is large share of direct taxes which has been seen a downward trend these days. These taxes should form a larger portion of total tax collection like in the countries USA & UK, India’s main focus must be on raising the share of direct taxes whereas the indirect taxes are consumption based and impact everyone equally. Focus on share can be done with adjustment of tax rates and widening the base.
#4 Improve compliance:
There are many reports which show how a small percentage India’s population pay taxes and avoids taxes. In the budget 2017 this fact has also been announced by finance minister.
|Tax as % of GDP|
The above table shows that how the tax collection vs GDP of India, compares with other countries.
Due to this difference in tax revenue, our growth in GDP is not much. But now with the emergence of the Goods and Service Tax (GST) tax compliance is likely to go up. This is the only method now with which tax revenue can increase and with demonetization it becomes interesting to see that how it impacts on growth and spending. Higher spending power of people or larger bank balance with them may also lead to inflationary in some conditions or circumstances.
#5 Increase in transparency of the fund flow
All the transactions for the inflow or outflow of the fund should be made transparent i.e. income tax department should be aware of all the fund transaction. The system could be made transparent by making it compulsion to make all transaction through bank, so that there is always a trail of the fund flow. By this way no one could evade tax liability, as all the transactions will leave a footprint after it. There will be more compliance of tax. Making India completely digital will definitely help to make tax structure world class.
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About the Author
Arpit Goyal is pursuing CA and B.com & also working as an article assistant in Gurgaon. He has an immense interest in Taxation. He loves to use technology to spread knowledge about taxation & accounts.