S.R. Wadhwa, Advocate,
National Vice-President
All India Federation of Tax Practitioners

Should There Be Cut In the Income Tax Rates?

Yes.  I am strongly in favour of a cut in the rates of income tax.  The maximum rate, both for corporate and non-corporate tax payers should be reduced from 30% to 25% and the middle tax slab for non-corporate tax-payers from 20% to 15%.  The surcharge of 10% of income tax was introduced as a temporary measure and has no justification to continue.

This tax cut will be beneficial to the country in several ways.  The national exchequer will reap the benefit of increased revenue collections because of improved voluntary compliance and increase in economic activities. The size of the underground or black economy will diminish significantly. The annual increase of 30% to 40% in the income tax collections continuously during the last 3-5 years is an eloquent testimony to the soundness of the Government’s fiscal policy of moderate tax rates and enlarged tax base with very few tax exemptions and tax incentives.  During April – December 2007, the direct tax collections have grown by a whopping 42% to Rs. 2.05 lac crores.  The collections for the full fiscal year are, therefore, likely to exceed Rs. 3 lac crores against the budgeted target of Rs. 2.67 lac crores.  This continued buoyancy has increased the tax- GDP ratio from 9.2% in 2003-04 to 11.4% in 2006-07 and will exceed 12% in 2007-08 against the target of 11.8%.  The fiscal deficit has also been declining and is well within the targets.

The cut in tax rates will increase domestic savings and investments.  It will also encourage greater inflows of technology and direct investments from abroad.  Largely, due to our robust economic growth and moderate taxation and more particularly the taxation of capital gains from equity investments, the foreign exchange inflows have been steadily increasing and our reserves have reached US$ 200 billion.  The increased economic activity as a result of tax cuts is likely to increase the annual growth rate to 10 – 10.5% against 9% targeted in the 11th Five Years’ Plan. 

There are several measures being taken to increase the buoyancy of tax revenues still further.  Simplifying tax structures including bringing into force a new Income tax Law, plugging of loop holes e.g. taxing gifts of money from non-related donors, improving tax administration and making increasing use of information technology to detect and punish law breaking and otherwise to strengthen tax compliance, will yield rich dividends in terms of additional revenues.  There should thus be no apprehension that any cut in tax rates will depress the buoyancy in income tax collections.

Moreover, our Finance Minister realizes very well the importance of taking from people, money through taxes, only what is needed by the Government for its genuine capital and revenue needs and not for indulging in any wasteful expenditure.  This is evident from his article of 17.11.2002, while deprecating the recommendation of Kelkar’s Task Force for more taxes, re-published in his book “A view from the outside”.

“In my view, no Government should take money from the people, through taxes, more than what it needs for genuine capital and revenue expenditure.  It is unfortunate that Mr. Kelkar’s task force has ignored the character of the Indian State (predatory, rapacious, corrupt and profligate) and pleaded for more taxes.  Instead, it should have pleaded for more equity and more efficiency”(p.202).

With his coming inside the Government in 2004, his very rational and pragmatic views do appear to have further strengthened. While increasing, in the Finance Bill 2007, the thresh hold limits for individual tax payers and removing surcharge on income tax on all firms and companies with taxable income of Rs. 1 crore or less, the Finance Minister mentioned them, in his Budget speech, as a reward for better compliance “by the tax payers”.    The compliance has improved still further this year and that too very significantly.  We, therefore, do hope that he will duly reward the tax payers in his Budget-2008, which would be his last, before the general elections of 2009.  More than benefiting the tax payers with some increases in their post tax incomes, it will greatly benefit the country with increased growth, more employment and more economic prosperity.