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Kolkata: With indirect tax reforms behind it, the government must focus on focus on widening the direct tax base, incentivising private sector investment and freezing peak direct tax rates to push growth further and generate employment opportunities, a report has emphasised. The report is titled 'Shaping India's New Taxation Ideology: Simplification, Moderation and Growth' and prepared by Think Change Forum (TCF), a thinktank.
The report has mentioned an advisory for policymakers. One of the highlights is urging them to extend the guiding motive behind GST reform to direct taxes. The think tank said that a freezing of peak tax rates can be implemented. Furthermore, the direct tax rate needs to be widened not through hike in tax rates but with the use of technology. It has also mentioned that the government could steer clear of MRP-based taxation after the compensation cess sunsets and that the GST input credit chain should be followed. The Centre should also push productive reinvestment of profits, and finally, take strong action against the parallel (read black) economy, smuggling and illicit trade.
The year 2025-26 will go down in India's economic history as a year when the government and Reserve Bank of India pulled out all stops to step up consumption, and growth. The Union Budget of 2025 kicked off the long process of incentivising consumption when Union finance minister Nirmala Sitharaman gave significant income tax relief in the form of zero effective income tax till a level of Rs 1.25 lakh per annum. Then came the GST rejig in early September when more than 91% of the goods and services witnessed a reduction or abolition of GST. Between February and December the RBI kept trimming the Repo Rate and brought it down from 6.5% to 5.25%, trying to stoke borrowing.
The report has cited the example of the GST reforms and said that it proved that simplification and tax moderation can coexist with robust growth of revenue. "As India approaches the Union Budget, the choices made will determine whether taxation becomes a catalyst for long-term economic expansion or a constraint on ambition," the report released on Dec 24 has mentioned.
Another interesting observation has been the suggestion to freeze peak direct tax rates borrowing from Arthashastra's principle of moderation to provide long-term certainty. The focus should be on expansion of the base and not raising peak rates. In any advanced economy, the tax to GDP ratio is high. Harping on the need to improve this ratio, the report flagged the fact that there are only 2.5-3 crore effective taxpayers in a population of more than 1.4 billion. The government should prioritise technology-driven base expansion by integrating GST, income tax and high-value consumption data instead of raising rates, the think tank suggested.
The report also highlighted a rather strange trend in the economy. It noted that corporate profitability has improved over the past 10 years but investment-to-GDP ratios have languished below the peak they achieved in 2011. The inference: more and more profits are being shovelled into financial assets rather than ploughing them into productive capacities.
The body suggested that the government could employ tax incentives to channel corporate earnings into manufacturing, R&D and job-creating assets rather than financial investments. The Centre should also draw up a blueprint to bring petroleum, electricity and other excluded inputs under GST. It will also help in avoiding cascading costs for industry.
