A clean direct tax code—which will cover income tax, corporate tax, dividend distribution tax, fringe benefit tax and wealth tax—should help promote economic efficiency as well as protect horizontal and vertical equity. Arbind Modi is a good choice to head the committee that will take a fresh look at the direct tax system. As we argued in these pages earlier, this asymmetry between direct tax payers and voters has created a political system that quite naturally cares more about spending to buy votes rather than building a more effective tax system that will spur economic growth. Second, the inability to grow the direct tax base rapidly enough—and this is what a cleaner direct tax system can achieve—has meant that the Indian state has to depend a lot on indirect taxes, which are fundamentally regressive. The focus right now should not be on lowering marginal tax rates, other than the commitment to bring down the corporate tax rate to globally competitive levels, but on increasing the tax base through a better direct tax system.

Source: Mint November 28, 2017 18:00 UTC