There is an urgent need for structural reform, streamlining tax rates and enhanced digital transaction incentives to bring clarity, efficiency and fairness to tax regime

The Indian tax system is notoriously complex and outdated, rooted in the six-decade-old Income Tax Act of 1961, which has undergone numerous amendments. These frequent, piecemeal adjustments have created a convoluted tax structure, leaving both taxpayers and administrators struggling with a lack of clarity.  Similarly, the Goods and Services Tax (GST) system, introduced in 2017 as a landmark reform to streamline indirect taxes, has also accumulated a variety of confusing provisions and multiple tax rates, making compliance challenging and costly for businesses. This layering of amendments and patchwork reforms in both direct and indirect tax regimes highlights the need for a comprehensive overhaul that simplifies the tax structure.

A unified, streamlined tax regime should be introduced, minimising the countless exemptions that are prone to misuse. Implementing the recommendations of the Raja Chelliah Committee to cap the highest income tax rate at 30 per cent in alignment with global norms-had previously succeeded in reducing black money transactions. However, with the reintroduction of additional surcharges and cess, this advantage has largely been negated. Restoring the 30 per cent cap on the highest tax slab would encourage more individuals to report their income accurately, avoiding tax evasion. An alternative solution could be to establish a permanent Voluntary Disclosure Scheme (VDS). Such a system would bring informal transactions, especially in high-value sectors like real estate, into the official economy if accompanied by a reduction in property registration fees to around 3 per cent. To foster transparency and discourage tax evasion, names of taxpayers disclosing income under this scheme could be made public on a government website.

Rationalising income tax exemptions would also help simplify the tax landscape. The baseline exemption limit should be set at Rs 5 lakh, removing exemptions for charitable donations, political contributions and even agricultural income, which are often exploited by high-net-worth individuals and celebrities to channel unaccounted income under the guise of agricultural profits. Farmers typically do not earn over Rs 5 lakh annually, so a limit based on this threshold could curtail abuse. Income between Rs5-10 lakh could be taxed at 10 per cent and income between Rs10-15 lakh at 20 per cent, with income above ? 15 lakh subject to the 30 per cent rate. Additionally, adopting the recommendation of the LK Jha Committee to shift the financial year from April-March to the calendar year would align India’s practices with international standards, further streamlining the tax system.

One glaring inefficiency in the tax system is the reliance on cash transactions, particularly for smaller amounts. All transactions above Rs10,000 should be conducted through banks. To encourage this, transaction fees on credit card payments should be reduced to 0.5 per cent-exempt from GST- and absorbed by the central government, which would also discontinue incentives for credit card purchases. This reduced fee would significantly increase credit card usage and thus bring more transactions into the formal economy. Currently, the high 2 per cent transaction fee often deters traders from using cards, especially in sectors with low profit margins, leading to extra charges for customers. Increased credit card usage would generate substantial tax revenue and boost the income of banks issuing cards, despite the lower transaction fee. To facilitate smooth payments, every GST-registered dealer should maintain at least two card-swiping machines and those refusing to accept cards should face strict penalties.

Another significant concern is the Input Tax Credit (ITC) mechanism in the GST regime, which has become a hotbed for tax evasion, especially in manufacturing. Unsold GST invoices are often purchased by manufacturers seeking ITC, who then receive cash back from sellers. This practice has exacerbated the currency-in-circulation issue that demonetization sought to address. To prevent misuse, an annual forensic audit could be mandated for all ITC claims. An even better solution might be to eliminate the 18 per cent GST slab and restrict ITC eligibility to specific sectors like tradable goods, which would streamline GST compliance for manufacturers and reduce tax evasion.

A simplified GST structure with just three tax slabs-6 per cent, 12 per cent and 30 per cent-would be far more manageable than the current system with multiple rates. India remains one of the few countries with such a fragmented GST system, which is often bewildering for businesses. Over time, the 6 per cent and 12 per cent slabs could be consolidated into a single 10 per cent rate. Essential raw materials such as agricultural products, fish and cotton yarn, which require further processing, could remain exempt. High-value items like cars, appliances, and electronics should fall under the 30 per cent GST bracket, while parts for these items could be taxed at 12 per cent. The existing system, which categorises similar items under different rates, such as clutch plates at 18 per cent and clutch bearings at 28 per cent, causes unnecessary confusion. Similarly, edible items sold by confectioners are subject to different rates, with sweets, biscuits and snacks varying between 5 per cent and 28 per cent.

Jewelry is another area that could benefit from rationalisation. The GST on gold jewelry could be split into two parts-one for the metal content and the other for making charges. Cess on luxury items could be replaced with additional GST slabs, ideally bringing petroleum products under the GST regime to standardise fuel prices nationwide. Further reforms should address inconsistencies in applying GST to government transactions, postal services, and foreign mail tariffs. It is counterintuitive for government payments to incur GST, as this creates unnecessary accounting complexities, merely transferring funds between government departments. Similarly, postal rates, both domestic and international, require a more logical pricing structure with consistent increments.

(The writer is Guinness World Record holder and RTI Consultant; views are personal)