Bold Tax Reform: PM's Silver Bullet

The government collects nearly Rs 15 lakh crore a year in direct and indirect taxes. Of this personal income tax is around Rs 3 lakh crore.

How many Indians pay this tax? About 3.7 crore or 3 per cent of the population. But just 4,20,000 people with taxable income over Rs 20 lakh a year account for nearly 65 per cent (Rs 2 lakh crore) of total personal tax collected. The rest - 99 per cent of all taxpayers - account for the balance 35 per cent (Rs 1 lakh crore).

Look again at the math: 4,20,000 wealthy Indians (around 1 per cent of all taxpayers) with taxable income above Rs 20 lakh collectively pay Rs 2 lakh crore in personal income tax every year. And 3.66 crore Indians (99 per cent) with taxable income below Rs 20 lakh collectively pay a total of just Rs 1 lakh crore in personal income tax. This is our vast middle-class - salaried employees, self-employed traders, small businessmen, etc. (TDS cut from salaries is included in the Rs 1 lakh crore the government collects from 3.66 crore Indians.)

Here's my proposal: tax all those with a taxable income below Rs 20 lakh at a flat rate of 10 per cent. Tax those with a taxable income above Rs 20 lakh at a flat rate of 20 per cent. No slabs. No exemptions. Only those with a taxable income below the current threshold of Rs 2.5 lakh (Rs. 3 lakh for seniors) would, as now, remain exempt from tax.

Since TDS is deducted at 10 per cent, most salaried employees will have to simply furnish a single compliance form annually. All others below the threshold taxable income limit of Rs 20 lakh would also need to submit a simple single-page annual return confirming compliance at a flat rate of 10 per cent.

By thus simplifying the tax code (which the cold-storaged Direct Tax Code was supposed to do), tax administration costs would fall. Nearly 3.7 crore taxpayers would save time and money. Corporate tax rates are anyway set to fall to 25 per cent by 2018-19, according to Finance Minister Arun Jaitley. Most exemptions in corporate tax will then also go.

So we could soon have a simple, effective tax regime. Personal tax: flat 10 per cent up to Rs 20 lakh taxable income and flat 20 per cent above Rs 20 lakh taxable income. No exemptions. Corporate tax: flat 25 per cent. No exemptions.

In personal income tax, while there could likely be a small initial net revenue loss, a simplified structure would actually increase compliance and revenue in the long term. When 99 per cent of taxpayers pay collectively just Rs 1 lakh crore a year (which is 6.70 per cent of total budgeted annual government receipts and a mere 0.75 per cent of GDP), simplification and compliance is the way forward

An small initial loss in tax revenue on the relatively low tax receipts of Rs 1 lakh crore collected today from the overwhelming majority of India's 3.7 crore taxpayers would be made up by four factors:

1. Higher revenue from a wider tax base, especially among HNWs above the Rs. 20 lakh taxable threshold.

2. Better compliance

3. Lower administration and litigation costs

4. Reduced corruption.

The Goods and Services Tax (GST), when finally implemented, will also boost tax revenue significantly, making this reformed, taxpayer-friendly structure both viable and desirable. The new tax structure will not only save time, minimise paperwork, cut corruption and reduce litigation but it will be revenue-neutral in the short term and revenue-surplus in the long term.

It is the kind of tax reform the Prime Minister should personally endorse. It could be his silver bullet for 2019.