Fiscal procedures have traversed a lengthy and winding road in India and there have been calls for Income Tax Reforms in 2018. At present, you have a system which charges income and not expenditure.

Income Tax Reforms in 2018

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As early as 1942, American economist Irving Fisher, propagated a paper describing how citizens are subjected to income tax which doubly charges savings and thus incentives them to spend money on consumption. Similarly, Nicholas Kaldor argued that a person’s expenses were a better estimation of ability to pay than income. Taxes on Income Tax Reforms do not take cognizance of the fact that people are different in their spending habits and their circumstances.

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The argument against Kaldor is that the tax system would stop being equitable and progressive when making expense the basis of taxation because the rich, who, are able to save more, would be taxed less. This criticism, one would like to explain, is a value judgement which considers it bad for the rich to be taxed. There are more flaws in Kaldor’s theory because the assumption that savings would always be diverted toward investment and increasing public utility and that consumption contributes nothing to economic production don’t hold much water with most schools of economic thought.

Deductions from Taxable Income.

The most widely accepted merit of the non-income-based levy is their property of being anti-inflationary. It has been commented before, that individual income tax brackets in India are only applied to the middle class with salaries. The poor do not pay direct taxes at least and the upper echelons have their investments, trusts and hedge funds to employ as deductions from taxable income.

While a change in tax base is debatable, there is adequate agreement that income tax administration needs a revamp. While online e-filing of income tax returns, automated grievance collection and assignment, digital response to tax orders and notices is a significant improvement there remains ample space for improvement.

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Among individuals, 30,000 income tax assesses reported incomes over Rupees 1 crore while 90% of them paid up only 23% of direct taxes. There is also the eye-catching detail of reduction in tax paying population from 2.7 crores in 2003 to 2 crores in the financial year ending 2017. Leakages in revenue collection from the informal sector need to be plugged.

Following the Laffer curve for a progressive tax, rates needed to be rationalized as part of income tax reforms in 2018. The lower limit for the incidence of Income Tax Reforms could have been raised to bring relief to the lower median of salary earners. The number of deductions and exemptions that exist only serve to confuse and take away from the ability of ordinary people to do taxes on their own.

Prudent personal finance calls for restricting essential and non-essential consumption to roughly a third of one’s income. Because indirect taxes already affect prices in a manner that is skewed against the consumer, consumption is already being taxed.

Accounting bodies have suggested that where accounting standards have been fully complied with, tax assessors should not review the method of tax audit to avoid prolonged litigation.

Disruptions to working capital flows of traders should be minimized. The continuous review by the GST council, it is hoped, will take care of this bottleneck.

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