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Editorial

Direct Taxes Cheer New data shows that there are positive takeaways in the direct taxes trend

October 24, 2018 06:18 AM

COURTESY TOI EDIT OCT 24

Direct Taxes Cheer
New data shows that there are positive takeaways in the direct taxes trend
Direct taxes are the main source of tax revenue for the central government. Data on direct taxes released this week, when juxtaposed with the budget, reveals interesting trends. After a lacklustre period there are clear signs of discernible improvement in tax collection and an expansion in tax base. The year 2017-18 was best in a decade, in terms of direct taxes as a percentage of GDP. On the other hand, the improvement has not yet resulted in the level of collection buoyancy recorded between 2002-03 and 2006-07. But on balance, the news is positive.

The growing incidence of digital transactions has provided a new channel for the income tax department to both expand the tax base by bringing in new assessees and curb evasion. This treasure trove of data is an important factor in a 40% expansion in number of tax payers over the last four years. This is certainly a positive development, but in terms of revenue potential it remains limited. This is on account of the modest salaries of a large part of the base.


It’s corporate income tax which provides most of the revenue and here the trend is encouraging. The common thread running through tax policies of different governments is the effort to close loopholes such as profit linked deductions and to check avoidance through minimum alternate tax. Consequently, the effective tax rate has risen from 19.37% in 2003-04 to 26.89% in 2016-17. This offers important policy takeaways. First, governments should continue on this path as it enhances the efficacy of policy. And second, this should be complemented with a reduction in tax rates which will encourage a greater level of voluntary compliance as well as ease the burden on honest tax payers.

 

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