Here are the reforms that India needs to compete with UK, US and China in tax deductions

In India, the tax rate on domestic companies is currently being levied at 30%, which is quiet high in comparison with the global standards.

Finance Minister Arun Jaitley, while presenting Budget 2015-2016, stated that the rate of corporate tax will be reduced to 25% over the next four years along with corresponding phasing out of exemptions and deductions available under the Income Tax Act, 1961.

The Finance Act, 2016 has phased out many exemptions and deductions available under the Act, however, the rate of tax has been reduced to 29%, that too, for a domestic company provided its total turnover or gross receipts in the previous year 2014-2015 does not exceed Rs. 5 crore.

Also, the Finance Act, 2015 increased the surcharge rate by 2% if the income exceeds a specified threshold, i.e. Rs 10 crore in case of a domestic company and Rs 1 crore in case of a firm.

So, expectations from Jaitley in Budget 2017 will be high on tax revenues and deductions. Some of the tax deductions have remained unchanged for nearly two decades. The government could consider adjusting these deductions to inflation and removing the ones which are redundant. This can be done for individual taxpayers.

“The government could consider adjusting these deductions to inflation and removing the ones which are redundant. This can be done for individual taxpayers,” said Archit Gupta, Founder, ClearTax.com.

In the US, personal tax deductions are inflation adjusted every year. While corporate tax rates could be linked to encouraging investment and flow of capital. Or tax free regime to encourage start-ups or specific sectors such as fintech.

Besides, the share of direct taxes in total collections has seen a downward trend. Since direct taxes play an important in ensuring equality they should form a larger portion of total tax collections. “Indirect taxes are consumption based and impact everyone equally, India must focus on raising the share of direct taxes like the US and UK. This can be done with a play of tax rates (between direct and indirect taxes) and widening of base,” said Gupta.

India also needs reforms in tax compliance. When compared to countries such as US, UK and China, the tax compliance of India, which reflects how our tax revenues keep up with the GDP growth, stands at 17.7%. Whereas, the tax compliance in US is 26.9% and UK is 34.4%.

“Hopefully, with recent digitisation drive and launch of GST, tax compliance is likely to go up. It will be interesting to watch how demonetisation impacts growth and spending. Higher bank balances can lead to higher spending, which can be inflationary in some circumstances. Digitisation could pave the way for financial inclusion for lakhs of people,” said Gupta.

Around 80% of transactions in the US and nearly 90% of transactions in UK are cashless. So there is a huge potential for India, which can lead to wider compliance and growth in filing of tax returns.

(Image: Thinkstock)