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November 29, 2017

Towards a Better Direct Tax System in India

The Modi government has recently announced a new committee set up to review the Income-tax Act 1961. This Mint editorial argues that this is a very welcome move that will complement the reforms initiated in the indirect taxation system with the rollout of GST and may even give the government fiscal space to bring down the GST rates.

 

Excerpts can be read below:

 

"The existing direct tax law is riddled with problems. It is extremely complicated, has ambiguities that create an excess of litigation, offers scope for administrative discretion that is often the fount of corruption, imposes high costs of compliance that especially hurt those with lower incomes, and has many exemptions that hurt allocative efficiency by distorting the decisions of participants in the economy. A clean direct tax code—which will cover income tax, corporate tax, dividend distribution tax, fringe benefit tax and wealth tax—should help promote economic efficiency as well as protect horizontal and vertical equity."

 

"A clean direct tax code will help achieve three key goals. First, it will help make the Indian economy more competitive through tax stability, minimal exemptions and the focus on allocative efficiency. Second, it could alter the Indian social contract by increasing the number of people paying income taxes. Third, higher direct tax collections could lower the tax burden on the poor by creating fiscal space for a reduction in GST rates."

 

Read the full report here.

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