Budget 2023: Bibek Debroy hopes to move towards exemption-less tax system

India's upcoming Union Budget should hopefully incentivize taxpayers to move towards an exemption-less direct tax system, which would increase revenue, broaden the tax base and reduce compliance cost and litigation, according to the chairman of the Economic Advisory Council to the Prime Minister.

"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," Bibek Debroy said. "What one needs to do, and I hope the budget does that, which is to incentivize the movement from a system with exemptions to an exemption-less system," he added.

While India is not going to be in a position to suddenly move to a system that has no exemptions at all, the country seeks to move to exemption-free era over a certain time frame, according to Debroy.

India's Finance Minister Nirmala Sitharaman is due to table her budget for the financial year 2023-24 on February 1 amid a rising chorus of voices that seek tweaks to the direct tax system, including doing away with exemptions.

The government in fiscal year 2020-21 introduced an exemption free personal income tax regime with lower tax rates. However, taxpayers were given the option of staying with the older tax regime under which they can continue to avail exemptions. Companies also have the option for availing lower tax rates as long as they stop availing exemptions.

Debroy has in the past also raise the issue. Last year, the official had said that "We must be willing to pay higher taxes or we must be willing to settle for reduced delivery of public goods and services."

The country as a whole is losing revenue on the indirect tax front as the average GST rate is lower than so-called revenue neutral rate.

However, tax collections have been robust this financial year, in line with the economic recovery.

The latest number means GST collections have now exceeded the Rs 1.4-lakh crore mark for 10 months in a row.

"Tax evasion is illegal and indeed the scrutiny that has happened both on the on direct tax as well as on the GST side had led to a reduction in tax evasion. I am not suggesting for a minute that it has been eliminated but it has definitely come down," Debroy said.