The second coming

The second coming

The new tax code must boost sagging economic spirits and usher India into the 21st century.

For the second time in a decade, India is attempting to reform its direct tax code. A task force has submitted a blueprint to reform the direct tax legislation to finance minister Nirmala Sitharaman. The report is not yet in public domain but the broad thrust is to lower tax rates, simplify the architecture and use IT extensively. It is welcome and we hope that it will have a greater impact than the last effort. Direct tax legislation plays an important role in influencing investment decisions. Getting it right will have a positive impact on India’s economic prospects.

For a while now, we have seen repeated attempts by governments to raise the effective rate of income and corporate taxes through special cesses and levies. For sure, there have been attempts to provide relief at the lower end of the spectrum for both personal and corporate taxes. But these have been offset by other decisions. A light touch regulation and moderate rates will have a beneficial impact on economic activity. Once economic momentum increases, it automatically translates into a higher quantum of revenue flowing into the exchequer. The new code should be driven by this approach.

One way of increasing economic momentum is to provide stability to the policy regime and complement it with an unobtrusive enforcement mechanism. For quite some time, the tax department has been legally empowered to use databases of banks and mutual funds to ensure that taxpayers do not evade their legitimate dues. The new code is expected to build on it. IT is a powerful tool which can reduce evasion quite dramatically. The potency of this tool to work in an unobtrusive manner is evident in OECD countries. India needs to match those standards.

Finally, a tax code has to be in sync with a country’s social and economic evolution. The reality for most people in India is that at a time when life spans are increasing, they have to manage a life of retirement without a pension. In an ideal world, a tax code should not provide any exemptions. The Indian reality is far from ideal. Therefore, it is heartening that the signs are that the proposed code is designed to accommodate this reality.