Hindu Editorial Analysis : 5-August-2024

The Indian government has announced plans to review the Income Tax Act of 1961. The aim is to address complex sections of the Act and simplify the tax structure. This move is essential for creating a fair and efficient tax system that works for everyone.

Background

India’s income tax system, established by the Income Tax Act of 1961, governs how income is taxed for individuals, businesses, and other entities. However, it has long been criticized for its complexity. This complexity can make it difficult for taxpayers to understand their obligations and comply effectively.

Key Issues in the Current System

Rising Personal Income Tax
  • Trend: The share of personal income tax has increased, while corporate tax revenue has declined.
  • Statistics: By February 2024, personal income tax accounted for 28% of total tax revenue, the highest it has ever been.
Indirect vs. Direct Taxes
  • Changing Dynamics: The share of indirect taxes, like GST, is increasing while direct taxes are declining.
  • Impact on Middle Class: Direct taxes are more progressive, meaning they tax higher earners more. However, middle-class taxpayers often feel the burden.
Complexity and Ambiguity

The Income Tax Act is filled with amendments that create a complicated legal framework. This can lead to confusion and disputes, making it essential to simplify the laws.

Tax Evasion and Black Money

Efforts to combat tax evasion are ongoing. The government has tried various methods, including demonetization, to address black money, but challenges remain.

Informal Economy

A large part of India’s economy is informal, making it hard to capture tax revenue. Encouraging formalization and broadening the tax base are necessary steps.

Capital Gains Tax

The capital gains tax impacts investment behavior. Striking a balance between collecting revenue and encouraging investment is crucial.

Suggestions for Reform

Simplification and Clarity
  • Redraft Contentious Sections: Review and revise complex sections of the Income Tax Act.
  • Clear Definitions: Provide straightforward definitions for key terms like “income” and “capital gains.”
Rationalizing Tax Rates
  • Simplified Structure: Streamline tax rates to make compliance easier.
  • Progressive Taxation: Adjust rates to ensure higher earners contribute a fair share while encouraging compliance.
Broaden the Tax Base
  • Increase Taxpayers: Encourage more individuals and businesses to pay taxes by lowering income thresholds or offering incentives for compliance.
Embrace Digital Transformation
  • E-filing and Digital Payments: Make tax filing and payment easier through technology.
  • Real-time Data Sharing: Use technology to detect tax fraud and enhance compliance.
Effective Dispute Resolution
  • Vivad Se Vishwas Scheme: A program to resolve tax disputes quickly and fairly.
  • Faceless Assessment: Use technology to make the assessment process more transparent and reduce bias.

Challenges Ahead

While the proposed reforms could greatly improve the income tax system, challenges remain. Political will is essential, as tax reforms can be unpopular. Careful management of the transition is also necessary to prevent disruption.

Why In News

The government has announced its intent to review the Income Tax Act (1961), aiming to fundamentally resolve the contentious sections of the Act through careful redrafting and simplification of the tax structure, ultimately seeking to create a fairer and more efficient system for all taxpayers.

MCQs about Reviewing India’s Income Tax Act

  1. What is the main goal of the government’s review of the Income Tax Act (1961)?
    A. To increase corporate tax rates
    B. To simplify and clarify the tax structure
    C. To eliminate personal income tax
    D. To enforce stricter penalties for tax evasion
    Correct Answer: B. To simplify and clarify the tax structure
    Explanation: The government aims to resolve contentious sections of the Income Tax Act by carefully redrafting and simplifying the tax structure, making it more efficient and fair for all taxpayers.
  2. As of February 2024, what percentage of India’s gross tax revenue was made up of personal income tax?
    A. 20%
    B. 25%
    C. 28%
    D. 30%
    Correct Answer: C. 28%
    Explanation: By February 2024, personal income tax accounted for 28% of the gross tax revenue.
  3. What challenge does the informal sector pose to India’s tax system?
    A. It primarily pays high corporate taxes
    B. It operates within the formal tax net
    C. It consists of unregistered businesses that evade taxes
    D. It has a large number of high-income earners
    Correct Answer: C. It consists of unregistered businesses that evade taxes
    Explanation: The informal sector includes unorganized businesses and self-employed individuals, making it difficult to capture tax revenue, as many transactions occur outside the formal tax net.
  4. Which reform aims to improve the dispute resolution process in India’s income tax system?
    A. Progressive Taxation
    B. Digital Payments
    C. Vivad Se Vishwas Scheme
    D. Capital Gains Tax Adjustment
    Correct Answer: C. Vivad Se Vishwas Scheme
    Explanation: The Vivad Se Vishwas Scheme is designed to help taxpayers resolve direct tax disputes efficiently, providing a way to settle pending appeals and avoid prolonged litigation.

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