Single low tax regime
What is the rate of the flat income tax?
- A taxation system known as a flat income tax rate has a consistent marginal rate that is often applied to individual or business income.
- Simply put, it is an income tax system in which all taxpayers, regardless of income level, pay the same tax rate. It also goes by the name proportionate taxation scheme.
- A proportional tax would be a genuine flat tax, however due to exclusions and deductions in the tax base, this system is typically implemented in a progressive manner rather than regressively.
Why is a flat income tax necessary?
- The present tax structure in India is progressive, with tax rates rising as income levels rise. A flat tax rate system is necessary to address the nation’s changing economic needs and to modernise the more than 50-year-old Income Tax Act, 1961, which is out of date.
What justifications exist for this?
- Some economists even advocate adopting a flat tax system or a reduced tax system, despite the fact that simplification and improved legal administration are two fundamental reforms India needs.
- Even low-income persons would find a flat tax rate of 12 percent acceptable, and the compliance rate would rise by eight percentage points to 33 percent.
- Hong Kong, Russia, and New Zealand are the best instances of taxation with a flat rate.
- During World War II, Hong Kong was one of the most impoverished nations. However, it implemented a flat tax in 1947, which had a significant positive impact on compliance rates and economic growth.
- Russia implemented a flat tax of 13 percent in 2001, and since then, its economy has grown by roughly 10%. Since citizens found it fair and simple to pay, Russia’s income tax revenue has increased by more than 50%.
- Broader bases and lower rates is the abbreviation for New Zealand. Tax law specialists in New Zealand place a strong emphasis on taxing a variety of actions at a low rate, or flat rate, and most crucially at the more straightforward tax code. In 1980, New Zealand eliminated deductions and write-offs in favour of the lowest rates for salaried employees. New Zealand is among the nations with the finest income tax policies due to its greater compliance rate.
What arguments are in opposition?
- The present tax structure in India is progressive, with tax rates rising as income levels rise. India is expected to spend in infrastructure and social welfare because it is a democratic nation. Consequently, a progressive tax rate is crucial.
- A flat tax structure may not be equitable for a growing nation like India, which is in the lower middle income range. Revenue inequality in India is among the highest, with 22 percent of the country’s income going to the top 1 percent.
- Such significant economic disparities can only be addressed with a progressive tax structure. In light of India’s current circumstances, a flat tax system will be regressive.
- A system that mandates a higher income tax rate for certain income groups helps raise money without burdening low-income taxpayers.
- Russia’s success is due to a number of improvements in the structure and administration of taxes, in addition to the adoption of a flat tax rate. By eliminating a large number of exemptions and deductions and raising taxes on a number of capital gains, the revisions enlarged the tax base.
India’s initiatives include:
- Chidambaram, a former finance minister, attempted to rewrite the Income Tax Act through the Direct Taxes Code in 2009. (DTC). It suggested a less complicated tax law, did away with pointless exemptions, and made room for lower tax rates. But because the 15th Lok Sabha was dissolved in 2014, the bill expired.
- Since taking office in 2014, the current administration has adopted general anti-avoidance rules (GAAR).
- The corporate tax rate would be lowered to 25 percent in five years, the finance minister announced in 2016.
- Individuals are currently free from paying taxes on income up to Rs 2.5 lakh per year.
Moving ahead:
- The establishment of a flat income tax rate system has been successful in many nations. It is past time for India to do the same. However, the government should put it into practise as a pilot project first in order to track its varied effects and find a workable solution to the problems that might arise during its implementation. Additionally, the government must make sure that any reform does not have an impact on the poor.
