Flat tax

Feb 24 2014, 03:18 IST
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SummaryFlattening the tax structure is the only way the government can hope to hike collections

Stagnating GDP growth pretty much makes it certain the government will miss its FY15 tax targets just as it did in FY14 when it made equally ambitious targets. As compared to a FY14 tax buoyancy of 1—a 1% hike in GDP growth causes a 1% hike in tax collections—the government is looking at a FY15 buoyancy of 1.4 times. Apart from GDP growth picking up significantly, two other factors will raise buoyancy—the DTC/GST and flattening tax rates. GDP won’t pick up in a hurry and DTC/GST won't be implemented quickly. But flattening rates is easier.

Tax data for personal income taxes shows people earning

R10-20 lakh pay an effective tax of just 8.6% versus around 20% for those with higher incomes. One reason for this is that India’s highest tax bracket kicks in too quickly, encouraging tax evasion—the highest 30% bracket kicks in at R10 lakh while DTC had recommended raising this to R25 lakh. Getting rid of the plethora of tax exemptions will also help since, right now, the taxman has no way of knowing whether a firm is evading taxes or simply making use of available exemptions—as compared to the corporate tax rate of 32.44%, the effective rate of tax is actually 22.85%. If the next

finance minister doesn’t work on this, tax targets will be missed again. By a bigmargin.

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