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Budget 2023: Top economists bat for removal of all income tax exemptions

Budget 2023: Top economists bat for removal of all income tax exemptions

Budget 2023: Top economists bat for removal of all income tax exemptions
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By CNBCTV18.com Jan 24, 2023 4:19:12 PM IST (Updated)

Arvind Panagariya has suggested that the time is ripe for ending all exemptions in personal-income taxation just as it has been done in the corporate tax.

Despite the global economic slowdown, the Indian economy has held steady. The country’s economy grew by 9.7 percent in the first half of 2022-23 making it well-positioned to become the world’s third-largest economy by 2028-29. However, major reforms would be needed, one of which is the removal of tax exemptions in personal-income taxation, suggested by many economists ahead of the Union Budget 2023.

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Finance Minister Nirmala Sitharaman is set to table the Union Budget for the financial year 2023-24 on February 1. This will be the last full Budget before the next election, thus a greater degree of populism is expected.
Professor of Economics at Columbia University and former Vice Chairman of Niti Aayog, Arvind Panagariya has suggested that the time is ripe for ending all exemptions in personal-income taxation just as it has been done in the corporate tax.
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In an opinion piece written for Economic Times, Panagariya suggested that those earning the same income are assessed the same tax liability, but when the tax system allows exemptions based on how income is earned or spent, individuals with the same income can end up with significantly different tax liabilities.
This distorts the allocation of resources and the pattern of consumption. These also turn innocent taxpayers into a hostage of chartered accountants at an individual level, Panagariya wrote.
He suggests that the forthcoming Budget must try to overcome this and introduce a more effective exemption-free option with lower tax rates.
Last month in an interview with Moneycontrol, Panagariya also suggested simplifying the personal tax. “It’s time we fixed the personal income tax system, and considerably simplified that. And much like what we have done with taxes on corporate profits, we need to end all exemptions, or most of them,” Panagariya told Moneycontrol.
Earlier, Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, also suggested that the upcoming Union Budget should incentivise taxpayers to move towards an exemption-less direct tax system. According to Debroy, the move would increase revenue, reduce compliance costs and litigation, and broaden the tax base.
“I think the big agenda on the direct tax side which is still pending is the removal of exemptions, both on the personal income tax side and the corporate side,” Debroy said in an interview with Moneycontrol.
Debroy added that India will not be able to suddenly move to a system without exemptions. However, the country is seeking to move to an exemption-free era over a time frame.
Back in 2020, Union Finance Minister Nirmala Sitharaman stated that the government intends to remove all income tax exemptions in the long run.
However, at the time, there was no time frame set by the government to remove all exemptions, Sitharaman said as per a Business Standard report.
Then, the Union Budget 2020-21 introduced a new tax regime where taxpayers were given the option to choose between the old regime with various deductions and exemptions and the new tax regime with lower tax rates and no exemptions or deductions.
The move was aimed to provide significant relief to individual taxpayers.
Later in 2022, the finance ministry proposed to review the exemption-free new tax regime with a view to making it more attractive for individual income taxpayers, as per an NDTV report.
The government aims to establish a system where there is no exemption and the complex old tax regime with exemptions and deductions is terminated.
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