Preparing for the Upcoming Interim Budget: India’s Income Tax System Challenges
India is readying for its interim budget presentation on February 1st, an event that will be followed by the full budget in July after the next government is elected. As such, this is a prime opportunity to consider the improvements the government needs to make regarding the country’s income tax system.
First, The Issue with Term Insurance Policies
Few Indians hold term insurance policies. These are insurance policies which offer a payout to the nominees if the policyholder dies within the term of the policy. Should the policyholder outlive the policy’s term, no payments are made. Over the years, life insurance companies have persuaded Indians to purchase life insurance as a means of tax preservation. However, these policies are largely investment-orientated rather than term insurance. This issue results in most Indian households that are financially able to pay insurance premiums having little life insurance to depend on in times of need.
In order to address this problem, a tax deduction of between ₹10,000 and ₹20,000 each year against the premium paid for a term insurance policy could be introduced. This would be in addition to the current ₹150,000 deduction under Section 80C of the Income Tax Act for other tax-saving investments.
Second, A Re-examination of Capital Gains Tax
The issue of taxation on capital gains through different investment forms needs a thorough review. At present, different tax rates and conditions apply to various forms of investments, leading to confusion and unnecessary complexity. The current tax system appears to favor the non-salaried affluent section of society, with its multiplicity of rules and rates that makes it difficult to navigate without the aid of a financial expert.
Third, A Review of Personal and Corporate Income Tax Collection
There has been a growth in personal income tax collected by the government over the years. In 2007-08, it accounted for 2.1% of gross domestic product (GDP), and in 2022-23, it reached 2.9%. This rate is anticipated to reach 2.98% in 2023-24, according to the 2023 budget. This surge is primarily due to increased marginal tax rates in recent years.
Meanwhile, the proportion of GDP accounted for by corporate income tax collected was 3.94% in 2007-08, 3.44% in 2014-15, and is projected to be 3.06% in 2023-24. The reduction in corporate income tax collection, despite rising corporate profits, is mainly due to a cut in the corporate tax rate in 2019.
Conclusion
In summary, the present income tax system appears to favor the non-salaried affluent and corporations, despite the necessity of equity in taxation. This imbalance needs to be addressed over the next five years, primarily by ensuring that different types of income are taxed at the same marginal rates. Additionally, corporations should be expected to pay a fair share of income tax to achieve a truly equitable system.
