Tax Reforms and Union Budget 2015: Are we moving towards an ‘Optimal Tax’ structure?

  • by Gaurav Bansal

With General Anti-Avoidance Rule (GAAR) and Goods and Services Tax (GST) to be implemented in couple of years and Union Budget’s rational announcements regarding the broader Tax reforms, it may very well be the case.

The Indian budget, made a couple of entirely sensible changes to the tax system. One is the abolition of the wealth tax, the other is the idea of lowering the corporate profits tax rate, but broadening the base, as it is collected upon by removing some exemptions and allowances.

The assurance of reducing the corporate tax rate from 30% to 25%, though over the next four years means a further thrust and push towards “Make in India” as the move will bring India’s corporate tax system at par with the global structure. While phasing out of the exemptions that lead to litigation and distortion in the tax system will ensure that the revenues are not affected much.

Service Tax Issue in short Run

The budget aimed at fiscal consolidation and tax reform has been carried on but the increase in service tax is likely to fuel inflation due to price rise, until GST is implemented fully. It would also be more cumbersome for the government to reign-in inflation given the fact that, currently we have multiple taxes on the same product, as many products in India invite both VAT and Service Tax and until these two are integrated into GST it would not be solved. As a consequence interest rates would not come down and the much needed impetus to manufacturing would be lacking, despite making so many concessions to the corporate sector.
However, in the long Run, the problem will be solved with the introduction of GST and in fact even in the short run also, the increase in service tax to 14% should be seen as precursor to GST implementation as the proposed tax rate under GST has also been recommended as 14-18 percent.

Impact of Wealth Tax Abolition

Before this budget, any Individual, or a Hindu undivided Family had to pay a wealth Tax as 1% on net wealth, over 30 lakh INR. Not only this included multiple taxation during each succession, it was also a difficult tax to track and administer, as a result expenditure on tax collections was higher than the tax collections themselves. It also involved high evasion and lead to generation of black money. Thus, it been rightfully removed. Finance minister Arun Jaitley said, “Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax?” However, overall tax collections aren’t likely to fall as, the government has introduced an additional 2% surcharge for those earning over 1 Crore INR p.a.


(First in three Article Series on Budget)

Gaurav Bansal