India’s tax system, like many around the world, relies on a combination of direct and indirect taxes. However, the value citizens receive for their contributions often sparks debate. While some envy the high taxes in Nordic countries with extensive social benefits, the reality in India often falls short. Basic services like healthcare frequently suffer from poor quality, forcing many to seek private alternatives despite the financial burden.
Unequal Burden and Narrow Base:
Further complicating the issue is the remarkably narrow tax base in India. The percentage of individuals paying direct taxes is significantly low, primarily attributed to political factors. This creates an unfair burden, where farmers earning over 1 crore pay no taxes, while those earning 10 lakh are subject to them. This disparity fuels resentment and dissatisfaction with the system.
Beyond the narrow base, a significant portion of the Indian economy operates informally. This makes tracking and taxing income challenging, further shrinking the base and hindering overall revenue collection. While those who do comply with the system often face high tax rates, perceived as exploiting their easier trackability. This incentivizes tax avoidance, creating a vicious cycle.
Challenges for Small Businesses and Cash Economy:
Small businesses with limited resources face another hurdle: the complex and burdensome tax compliance procedures. This discourages formalization and further fuels the informal economy. Additionally, many informal businesses harbor a deep fear of getting caught in the tax net and facing permanent scrutiny. This fear drives them further towards operating in cash, circumventing the formal system altogether.
Despite efforts to reduce the cash economy’s prevalence, it remains a prominent component of India’s GDP. This highlights the need for more effective solutions to address the underlying issues driving informality. Unfortunately, no major political party actively tackles these challenges, leaving the system largely unchanged.
Path Forward: A Vision for Reform:
Addressing these challenges requires a multi-pronged approach:
- Broadening the Tax Base: Expanding the net to capture more individuals and businesses, including agricultural income exceeding a certain threshold, is crucial. This can be achieved through improved data collection, streamlined compliance procedures, and addressing political resistance.
- Simplifying Tax Compliance: Reducing the complexity of tax procedures for small businesses will incentivize formalization and widen the tax base. This can involve leveraging technology, offering simplified filing options, and providing clear guidance.
- Enhancing Service Delivery: Ensuring citizens receive tangible benefits for their tax contributions is key to building trust and compliance. This requires significant investment in improving the quality of essential services like healthcare and education.
- Promoting Transparency and Accountability: Building trust in the tax system requires greater transparency in tax administration and holding authorities accountable for misuse of funds. This can be achieved through public audits, independent oversight mechanisms, and open data initiatives.
A fair and efficient tax system is critical for India’s economic growth and social development. Addressing the existing flaws requires a concerted effort from policymakers, businesses, and citizens alike. By implementing comprehensive reforms, India can move towards a more equitable and sustainable tax system that benefits all stakeholders.