Time for a Cut in Taxes

In the 50 days’ time that Prime Minister rendra Modi sought from the tion to stabilize the effects of demonetization, a lot has happened to justify the demonetization operation. More than 82 per cent of the Rs 500 and Rs 1,000 notes had been recovered even before the deadline of 30 December 2016, the direct tax revenue had shot up sharply and there are now also clear indications that the number of direct tax assesses will increase sharply. As time goes by, some of the unexpected and temporary adverse effects of demonetization (such as loss of jobs in economic operations carried out solely in cash and difficulties faced by people due to the withdrawal limit of Rs 2,000 set for ATMs) are getting ironed out. Even so, it will take a few months for things to return to absolute normalcy, partly because the high denomition currency notes that were demonetized have been replaced by a currency note of even higher denomition, mely the Rs 2,000 note. The present milieu is one that calls for a logical reduction in direct taxes. The most important reason for this is that there will now be a quantum jump in the number of people in the direct tax bracket. People who ought to have been paying direct taxes but had not, will now begin to appreciate the hazards of evading taxes. That being the logical expectation, there is strong justification in cutting down direct tax rates since even with lowered tax rates the government will increase tax revenues substantially. With lowered direct tax rates, the number of willing tax-payers will also increase substantially.