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Reviving Indian Economy - Bold Tax Measures Required

The Covid 19 situation continues to worsen in India and there is no clarity when we will reach the peak and the situation would return to near normalcy.

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The Indian economy has contracted by a massive 23.9 per cent during the quarter ended 30 June 2020. This makes it the highest contracting large economy in the world as compared to contraction of 9.5 per cent in the US and an average of 10 per cent globally. The Covid 19 situation continues to worsen in India and there is no clarity when we will reach the peak and the situation would return to near normalcy. The geo-political situation has added to the economic challenges. The recent estimates by Goldman Sachs and Fitch have estimated that the Indian economy will contract by 10.5 per cent to 14.5 per cent for FY 2020-21, the first contraction in the past 40 years.

The government has acted decisively to counter both Covid 19 crisis and protecting national sovereignty but needs to act similarly on the economic front. In this backdrop, what should be India’s response? The only answer is reforms for attracting new investment and employment generation. There are certain bold tax reforms which can enable us to turn this crisis into opportunity which are discussed in this article. These tax reforms are tax neutral and will boost growth without resulting in loss of tax revenue.

Tax Immunity for Global Bonds

We need to revive the investment cycle and raise capital to enable the businesses to meet their requirements for re-commencing and reviving the businesses. The government is already facing a huge fiscal deficit and does not have additional resources on this front. We need to tap external sources to revive our investment cycle and bring growth back. The immunity scheme for attracting foreign funds in 2016 did not meet the desired objective due to high tax rate of 60% and the other fallouts. A large number of non-resident Indians and foreign investors are interested to invest in India but are wary of Indian tax regulations and investigations. In case global bonds are issued with complete tax and FEMA immunity to the subscribers and resident relatives receiving gifts and carrying reasonable interest rates, it has the potential to raise US$ 50 to 100 billion. It may be pointed out that a similar scheme announced in Indonesia in 2016 attracted US$ 330 billion and in Italy in 2015 attracted Euro 60 billion. Certainly, India has the potential to attract even greater investment. The new investment just by itself can boost the GDP by 2 per cent to 3 per cent. The bond proceeds can be used for infrastructural projects of the government so that the returns from these projects can be used to meet the interest and repayment obligations. 

Incentivising Tax Compliance

It is estimated that the tax collection for FY 2020-21 will be substantially lower than the tax collection for FY 2019-20 and the budgeted revenue. Under these circumstances, a new tax deduction should be allowed to the taxpayer to the extent of 75 per cent of the incremental taxable income for FY 2020-21 over the taxable income reported for FY 2018-19. This will ensure firstly that the tax base of FY 2018-19 is preserved before granting any benefit. Secondly, the incremental income would result in effective tax of about 7.5% in case of companies opting for a new tax regime and about 11 per cent in case of individuals. This will result in massive increase in tax compliance and channelize funds into the formal economy. This apart from resulting in additional direct tax collection would also result in massive increase in GST due to additionally induced investment and consumption. 

Incentivising Employment Broad basing section 80JJAA

It is only by preserving jobs that we can ensure consumption and revival of the economy. It is estimated that during Covid crisis, 19 million jobs have been lost in the formal economy and even a larger number in the unorganized sector. 

The present provisions of section 80JJAA  though well intended are grossly inadequate to meet the current massive challenge of unemployment. At present, under Section 80JJAA, deduction of 30% of additional employee cost for three financial years is available to all assesses who are subject to tax audit under section 44AB for both manufacturing and service sectors. Among the other stringent conditions, the conditions which in particular seems to have negatively impacted job creation is the (a) restriction on the total emoluments (upto Rs. 25,000 per month) and (b) restricting the deduction to additional employees. 

It is widely accepted that employment generation is key to economic growth and has a multiplier effect of appx. 7 times. It is necessary to increase the limit of emoluments to Rs. 100,000 a month from Rs. 25,000 per month as this is the segment which has maximum impact on consumption and revival of demand. It is also more appropriate to extend the benefit to the overall employee cost and not merely to new employees albeit at a reduced rate of 10% instead of 30% of the additional employee cost. This will ensure that not only the new job creation is critical, but preservation of existing jobs get the same beneficial treatment and prevent abuse by shifting employees. Such loss from increased deduction shall be offset by additional economic activity resulting in additional GST and direct tax collection. 

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Tags assigned to this article:
tax measures indian economy GST bills

Dr Suresh Surana

The author is Founder, RSM India

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