Demonetization May Lead to Lower Taxes

Stand by for the important announcement

As we wait for an important announcement from the Government on completion of specified period since demonetization was announced on 8^th November, 2016, may be from Prime Minster himself, everyone is worried and excited as to what next ? While it is hoped that things will be for better, this is what could be in store for the country men –

• Easing out of withdrawal limits for ATM’s and from Bank Accounts
• Official figures on money returned till date could be revealed
• Course of action for people still left with money
• Fiscal incentives for assessees / small businesses
• Relief measures other than tax reliefs
• Tax reliefs may come through Budget 2017
• Further measures to curb corruption and black money through
• Bullion / jewellery transactions and holdings
• Vigilance on benami transaction in properties
• Incentives on electronic and digital transactions / payments
• Something big to happen from 1^st January, 2017.
• Prime Minister wishing new year to everyone.

Why taxes are expected to be lowered

There is a general sentiment everywhere that India may witness a lower tax regime hence forth. This is the hope of citizens and businessmen as also being realized (off late) by the Government and tax administration.

In direct taxes, the percentage of people contributing by way of income tax and corporate taxes is negligible, given the population of earning population. The number of tax payers as well as their contribution is low. Tax to GDP ratio is hovering around 10 percent since last fifteen years whereas in the world, many developed nations have such ratio ranging between 17-30 percent.

India’s GDP for FY 2016-17 is expected to be in the range of 6.9 – 7.5 percent, a slightly low estimate post demonetization exercise.

Some of the reasons which could be attributed for lower tax rates in future, to list a few, are as follows –

• Government’s appreciation of the fact that a lower tax rate regime spread over a large tax base (assessees) is a better option.
• Change in tax administrator’s mindset that a higher tax regime leads to large tax evasion.
• Simpler tax laws with e-tax compliance would lead to better compliances and more tax collection coupled with reduced litigation
• Various tax amnesty schemes would reduce tax litigation and bring tax evaders to main stream
• Shrinking black money in the system would bring more businesses in the main tax compliant stream
• As an effect of demonetization, black money transactions would reduce substantially and more transaction would into tax net
• With about Rs. 15 lakh crore of demonetized notes now with banks, bank interest would be subject to tax base and tax collections will rise
• Better tracking of transactions due to low cash with public / businesses at large and more electronic payments
• With GST in offing in new future, most of the transactions would come under tax less and parallel economy will significantly shrink.
• Indirect tax reforms would substantially contribute to tax revenues.
• Huge amount of extravagant expenditure is expected to come down leading to its application in other productive options which would in turn lead to tax revenues.

It is hoped that we may look for a low tax regime with other significant tax reforms in near future.  2017 could witness lower taxes, both direct as well as indirect.

Let’s hope for the best with the sunrise of 1^st January, 2017.

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