Direct tax collections have been buoyant this year. Sustaining the momentum in the coming years, given the challenges on the growth front, may be tough. But yet, buoyant revenues are key to the Centre’s plan of bringing the fiscal deficit to 4.5 per cent of GDP by 2025-26.

The Centre is, therefore, right in looking at ways to boost tax revenue by plugging loopholes currently being exploited to evade tax, especially by the affluent class.

In a recent post-Budget interaction organised by this newspaper, Finance Secretary, TV Somanathan, emphasised that the Centre will make a concerted effort to identify and plug unintended tax breaks, which arise due to oversight in tax laws.  

While this is welcome, the Centre should also use other means such as bringing down tax rates and trying to increase the tax base and going after the high-income tax evaders, to boost the tax kitty.   

The move in the Budget to remove the tax exemption for life insurance policies (other than ULIPs) with a premium  over ₹5 lakh is a particularly good one. These high value policies typically have a fairly large investment component and are being sold to high net-worth individuals by highlighting the higher yields resulting from the tax exemption.

In fact, it may not be a bad idea to lower the threshold for claiming tax exemption to ₹2 lakh, since pure term covers do not need such high premiums. Similarly, limiting the capital gains deduction that can be availed of by investing in a residential property to ₹10 crore, also closes a route being used by HNIs to save on tax.

The change in rules regarding market-linked debentures — taxing the capital gains tax arising on transfer, redemption or maturity as short-term capital gains — is also justified since these instruments are more in the nature of derivative products and the interest on these products varies with market performance.

There is no justification to tax the long-term capital gain on these products at a favourable rate of 10 per cent without indexation. The proposal to tax distribution of income earned by REITs and InVITs through repayment of debt also impacts the wealthy investors who park their money in these high-value products; neither the investor nor the business trust has been paying tax on this income, so far.

The Centre will have to continue with its efforts to plug such tax loopholes. Besides this, it is also important to identify high networth tax evaders. With just eight crore individuals filing income tax returns, there is a need to increase the tax base.

Real estate and gold purchases, where most of high value transactions using black money is routed, need a review. The Adani-Hindenburg episode suggests that round-tripping through offshore shell companies continues. Ultimately, the Centre should endeavour to bring down the tax rates across income slabs so that the incentive to dodge taxes abates.

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