A simple proposition for increasing tax base and simplifying tax regime in India

    In India very small percentage of people (less than one third can be a rough guess) earn enough to pay tax and even a smaller percentage (less than 5%) actually pay. We have a small tax to GDP ratio (about 18%). 

There are two strange things. The famous 80:20 rule applies here too. Rather it become 90:10. Of those who pay tax, 90% pay 10% of the tax (those earning below 5 lakh per annum) and 90% of tax come from very rich that are less than 10% of the taxpayer population.

And secondly, as clear from tax GDP ratio , its the indirect tax which plays a huge role in total tax collection.

Two main reasons i think why tax collection are,

1. the tax rates are too high and 

2. poor perception of government due to corruption. People think the govt is taking almost a third of their income and wasting it.

I think the tax rates for lower income group should be minimized so that people can have a better standard of living. They anyways pay a lot of indirect tax whenever they purchase any product or service. I have this proposition of lower tax rates with mandatory investment in long term bonds. My idea seems very simplistic but I think we should at least think in this direction. It is just the first draft and is open to suggestions and revisions based on advice of experts.

Instead of taxing, make it mandatory to invest in long term bonds for social and physical infrastructure. This will include govt. bonds, municipal bonds, long term infra bonds and long term (5 yr +) deposits etc. When people will invest in municipal bonds, they will be able to see how that fund is utilized and will have an ownership feeling.

My proposal is like this.

Annual income (Rs.)	Tax rates	Exemption detail	Target
Upto 3 lakh	No tax		Low income population
3-10 lakh	10%	Exemption on investment in insurance and long term bonds upto Rs 2 lakh The tax seems to be less but we will remove all other exemptions like LTA HRA etc and overall process will be greatly simplified	Most of service class population Purpose is to simpify tax process for 5-10 lakh Rs income group
10-20 lakh	15%	-minimum 10% of income above 10 lakh to be invested mandatorily  -More exemption on upto 30% of income above 10 lakh, that is upto 3 lakh) for long term investment -5% surcharge on tax on income above 10 lakh	Middle class with white color jobs, professionals (Removing HRA and home loan exemption would balance the lower rate of tax. This will help reduce interest rates and inflation in real state sector)
		Now focus on rich who does not pay tax. its better to make certain part of income to be mandatorily invested instead of taxed	special tax saving bonds with moderate return should be made for them
20-50 lakh	20%	-minimum 10% of income above 20 lakh to be invested mandatorily (in addition to mandatory investment of 1 lakh in previous slab) -exemption on upto 30% of income above 20 lakh(that is upto 9 lakh max) on long term investment (in addition to 3 lakh exemption of previous slab) -10% surcharge on tax on income above 20 lakh	high income professionals (encourage investment and avoid tax evasion)
50 lakh  to 2 cr	25%	-minimum 10% of income above 50 lakh to be  mandatorily invested (in addition to 4 lakh) -more exemption upto 30% above 50 lakh -10% surcharge on tax on income above 50 lakh	small businessmen who do everything to avoid taxes, investment in capital infrastructure can be exempted
2 crore and above	30%	-minimum 10% of income above 2 cr to be invested (in addition to 19 lakh) -up to 30% of income above 2 cr can be invested in long term bonds without tax -more rebate can be given on special bonds above 1cr value for tax saving purpose only that may have low returns (say 5%)	Instead of 30% tax, make 30% investment. even if rerun is low, tax saving itself is 30%.

With lower tax rates some simplification should also be done to balance that. All exemptions on HRA, LTA etc should be removed and only insurance (health and general), PF and pension fund should be exempted. HRA contribute to higher rent and ultimately the landlord or the home loan giving bank get what the govt. should have got. Exemption on Home loan should also be removed as it also contribute to high home prices and high interest rates which makes real estate even more costlier and contribute in making a bubble in this sector. Simplified calculation would help easier assessment and greater compliance.

This will solve many problems,

1. with lower tax rate, tax base will increase

2. presently banks are stressed because they are financing long term projects while there income is from small term saving accounts. We must have a separate long term fund in terms of a strong bond market to fund long term infrastructure projects.

3. the purpose of tax is to invest in social infrastructure. If we make people invest directly in these developments, people will be more willing to pay tax.
4. the black money would be redirected to white economy and bubble of real estate will also come deflate  as black money has a huge role in high real estate prices.
5. A municipal/panchayat level fund mgmt body can be created to utilise this fund in local area and infra dev like hospital, road , transport, water mgmt etc. This will provide better infrastructure investment in local area governance.


We need to have a change of mindset about how we tax our citizen and how much value we provide to them from the tax they give to the government.

Note:

Some idea of data from this blog

How many Indians pay income tax