Tax Reform Agenda in India

The reform agenda for both income taxes and indirect taxes in India has aimed for a broad-based regime with low tax rates. Significant changes include:

• Reduction in the number of income tax slabs, stabilizing at three by the late 1990s.
• Reduction of incentives, with the introduction of sunset clauses for certain regimes.
• Introduction of a lower rate regime with no exemptions for corporations and individuals.

Revenue Foregone Statement

Since the 2006-07 Budget, the Government of India has published revenue foregone statements to enhance transparency and facilitate discussions on exemptions.

• The ratio of revenue foregone to total revenue collected has declined for corporate tax.
• Post-2016-17, the decline is linked to the alternative tax regime offering a lower rate without exemptions.

Corporate Taxpayer Regime Choice

As of 2022-23, 41% of reported income is under the old regime, slightly down from 43% in 2021-22.

• Despite progress, achieving a no-exemption regime requires further steps.

Personal Income Tax (PIT) Complexity

PIT has shown higher ratios of revenue foregone compared to Corporate Income Tax (CIT):

• PIT collections have surpassed CIT, indicating significant incentives' role.
• Revenue foregone ratios spiked in 2019-20 due to the Covid-19 pandemic and declined thereafter, but remained over 20% in 2023-24.

Breakdown of Revenue Foregone for Individuals

• Section 80C has been the largest contributor, though its share fell from 82% in 2013-14 to 52% in 2022-23.
• Important components include pension schemes, medical insurance, and section 87A rebates for lower tax brackets.

Options for Reforming PIT Incentives

Considering options for restructuring incentives:

• Phase out incentives over time to expand the tax base and maintain taxpayer inclusion.
• Enhance the alternative regime to make it more attractive by increasing tax benefits, reducing taxpayer numbers in the old regime.

Union Budget 2025-26 Approach

The Budget introduced significant changes in the individual income tax regime:

• Increased the effective exemption threshold from Rs 7 lakh to Rs 12 lakh.
• Individuals earning less than Rs 12 lakh pay no taxes under the new regime.
• Even those above Rs 12 lakh benefit from lower rates compared to the old regime.

The overarching question remains: how to construct a more robust income-tax regime and potentially phase out the old regime to achieve long-term stability in revenue collections.