India should refrain from raising income tax exemption limit: Economic Survey

To increase the tax base, India should refrain from raising the income tax exemption limit, the Economic Survey said on Friday, pitching for taxing the well-off across agriculture, industry, services and real estate.

At present, agricultural income is exempt from income tax.

“One low-hanging fruit that we suggested was to refrain from raising exemption thresholds and allowing natural growth in income to increase the number of taxpayers. In some ways, this would be reform through inaction,” the Survey for 2015-16 said.

Coming just ahead of the Union budget, it should put to rest any hopes of a possible increase in the income tax exemption limit for individuals.

Pointing out that only around 5.5% of earning individuals are in the tax net, the Survey said generous economic policies of the government are responsible to some extent for such a small base.

“We can calculate in some sense the ‘missing taxpayers’ in India—not those who are evading taxes altogether or under-reporting taxes but those who have legitimately gone under the tax radar due to ‘generous’ government policy. We ask how many taxpayers there would have been in 2012-13 if the threshold had been maintained at Rs.1,50,000 (the threshold limit in 2008-09). We find that there would have been an additional 1.65 crore units incorporated within the taxation system (an addition of about 39.5%) and tax revenues would have been about Rs.31,500 crore greater. India’s tax-GDP would have increased by 0.32% just by not having raised the threshold so generously,” it said.

The Survey also added that better utilization of public resources and better targeting of subsidies will assure citizens that public resources are not being wasted and make them more willing to pay taxes.

It also stressed the need for phasing out tax exemptions, which it argued amounted to redistribution towards the richer private sector.

“Reasonable taxation of the better-off, regardless of where they get their income from—industry, services, real estate or agriculture—will also help build legitimacy,” the Survey said.

The Survey said there was a need to develop property taxation. “The very fact that systematic data on property taxation across the country is so sparse is a measure of just how little attention has been given to this tax. Property taxes are especially desirable because they are progressive, buoyant (at least in the Indian context), and difficult to evade, since they are imposed on a non-mobile good, which can with today’s technologies, be relatively easily identified,” it said.

It added that higher rates can help in improving local government finances as well as reducing property speculation.

Source : Livemint