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6th September 2023 (10 Topics)

A Less taxing Time

Context:

As India grows into a higher-income nation with more organized businesses, the government will earn more money, so it must spend it wisely.

Expanding Taxpayer Base and Lower Tax Rates

  • Growing Taxpayer Base: India has seen an increase in both direct and indirect tax payers, including individuals and companies, despite slower economic growth.
  • Shift to Lower Taxes: The government's decision to lower tax rates, such as corporate tax and personal income tax, has contributed to a stable tax-to-GDP ratio.
  • Formalization's Role: The formalization of the economy and simplified tax processes have discouraged tax evasion but not significantly boosted tax revenue.

Impact of Tax Cuts on Revenue

  • Corporate Tax Reduction: Corporate tax rates were reduced from 30% to 22%, leading to a decline in the corporate tax-to-GDP ratio from 3.5% to around 3.1%.
  • Personal Income Tax Changes: Tax rebates for individuals with taxable income up to Rs 5 lakh increased the tax-to-GDP ratio but also led to more individuals with zero tax liability.
  • GST Rate Cuts: Despite a weighted average GST rate reduction from 14.4% to 11.6%, GST collections remained stable at 6.6% of GDP in 2022-23.

Fiscal Foundations Strengthening

  • Future Revenue Potential: As India progresses towards upper-middle-income status with an expanding organized sector, tax revenue gains are expected to increase, providing more fiscal space.
  • Caution against Overspending: While revenue growth offers opportunities for government spending, it's essential not to squander gains through excessive giveaways.
  • Policy Considerations: Policymakers must strike a balance between lower tax rates and revenue requirements to sustain economic development.
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