Steps The Government Must Initiate To Widen The Tax Base In FY 2021

Vivek Jalan 

Founder, Tax Connect Advisory Services 

Steps The Government Must Initiate To Widen The Tax Base In FY 2021 

As India struggles to revive a sluggish economy, the government faces multiple contradictory challenges of infusing liquidity in the system, boosting consumer demand while still keeping the fiscal deficit under reasonable check. India’s fiscal deficit stood at Rs 5.54 lakh crore at the end of August, 2019 even as credit rating agency Fitch predicted that it would be as much as 3.7 per cent of the GDP for fiscal year 2019-20. The revenue deficit stood at Rs 4.36 lakh crore at the end of August 2019. 

With a widening fiscal deficit a major concern, particularly at a time of declining growth, the government on the one hand needs to pump in more savings into the hands of consumers to boost consumption, while on the other hand, it needs to increase revenue at hand. No doubt, Finance Minister Nirmala Sitharaman has an enviable task at hand. In fact, media reports have already suggested that the finance ministry is looking for ways to widen the tax base in the FY21 by plugging loopholes in the law, especially in areas of tax exemptions and concessional tax schemes. India’s taxpaying population has traditionally remained low. In fact, the gross tax to GDP ratio declined to 10.9 per cent in 2018-19. The total income declared by individuals during AY 2019 stood at Rs 34.1 trillion. Of this Rs 20 trillion was declared by the salaried class while the business income stood at merely Rs 9.3 trillion. Generating more revenue will not only give the government more funds to infuse into public welfare schemes but will also allow them more leeway in initiating policies that generate more income and jobs in the economy. The government has to find intelligent ways to increase the Tax Base. The following are some of the suggested ways which may be out of the box but might prove effective: 

Initiate Dispute Resolution or voluntary income disclosure scheme 

After Demonetisation and GST Implementation and the consequential high pitched assessments in Income Tax, the time is ripe for a ‘Dispute Resolution Scheme in Income Tax’ wherein pending disputes can be settled after paying certain portion of the disputed taxes on the one hand and helping citizens to come into the mainstream economy on the other hand. Such a scheme, if drafted and implemented with sincerity, would certainly be highly impactful at this hour of widening Fiscal Deficit. It would also increase the tax base as most of the citizens would grab the opportunity to discard old baggage and make a fresh start in a New India! 

Scan bank lockers for undeclared income 

‘Bank Lockers’ are another untapped area. Again as a first step, linking of locker holders to PAN/Aadhaar should be done. Post this, mandatory disclosure of the possessions therein may also be required. This would again have the effect of getting a lot of dormant wealth circulating back into the mainstream economy. 

Trace black money in the banks 

Despite implementing initiatives such as the demonetisation and linking of bank accounts with Aadhaar, even today, much of the black money is still in the banking channel in the form of Bank Accounts which have been opened without a PAN. It should be made mandatory for Banks to take Aadhaar or PAN number of these Bank Account Holders and then trace it with their IT Return. The data of such accounts can be made available easily. 

Reform tax slabs to put more money into people’s hands 

Apart from the above two exercises, the Government should also increase the Tax Threshold Limit to Rs 5 Lakh, the 10 per cent Tax Bracket to Rs 10 Lakh and 20 per cent Tax Bracket to Rs 20 Lakh. This would help in putting the much-needed money into the hands of the masses, a step badly needed to revive the slumping consumer demand. While the government has already initiated a series of sector-based measures to address the supply side bottlenecks, reforming tax slabs will help address the Demand Side problem in the economy and increase consumption. It would also be an incentive to file returns and disclose income.