Increase In Tax Base

The tax base is important because it determines the revenue raised by taxes. Governments need to raise revenues since they incur expenses and must pay for them somehow. Tax bases are also important because they reflect the economic situation in an area.

Tax bases are fundamental in determining the number of tax liabilities for any given jurisdiction. The amount of tax collected from each taxpayer is directly proportional to the size of their tax base. A larger base means more tax revenue for the government, so it works to increase the tax base as much as possible.

What is a Tax Base?

A tax base is the total sum of earnings taxed by a taxing authority, typically the government. It’s used to figure out how much tax you owe. This can take various forms, such as Income or property.

A tax base considers the entire population and not just those taxed. Many people may not be paying taxes but are still accounted for as part of the tax base. Tax bases also include exemptions, credits, and deductions that taxpayers may take advantage of.

For example, if the tax base decreases, this may indicate that people are doing worse financially, which could signify an economic downturn.

Learn about Increase In Tax Base

To increase the tax base, tax authorities should begin with simpler taxes that are easily collected.

For example, presumptive taxes aim to bring potential taxpayers onto the tax register to increase the tax base.

Increasing the tax base also requires expanding the tax register to include several businesses operating in the informal sector.

The tax authorities should intensify tax education because several potential taxpayers have a lot of fears about tax because they do not understand it.

The tax authorities should establish collaborative relationships with chambers of commerce, trade associations, and professional bodies involved in advising the private sector to assist potential taxpayers in becoming tax compliant.

More assets

You might expect that more assets would lead to higher tax bills and liability increases to lower ones. But this is not necessarily the case. For instance, if you buy a house, you increase your liability for taxes on the house’s value and increase your tax base by taking out a mortgage.

A fund manager might be tempted to switch assets and liabilities or buy two assets with different bases to have a bigger tax bill. But the opposite strategy works too. If you buy two assets with different bases, then the fund manager could reduce their liability for taxes (by selling one of them) or increase it (by buying another).

In short, if you want to maximise your after-tax return from any investment, you should invest in more assets with equal tax bases and liabilities.

The total value of the financial streams or assets that can be taxed. For example, in the case of income tax, the tax base is determined by what the tax authorities define as the minimal level of annual revenue that can be taxed (Taxable Income). An asset’s tax base and liability:

Increases in assets raise your taxes, while increases in liabilities lower your taxes.

The tax base always acts in the opposite direction. A higher tax base for assets offsets other assets (creating a deferred tax asset), and a higher tax base for a liability offsets other liability increases (creating a deferred tax asset) (creating deferred tax liability). 

Presumptive Tax

The presumptive taxation scheme was introduced in India to widen the tax base, prevent under-reporting/evasion of Income and bring more taxpayers under the tax net. The presumptive taxation scheme is also intended to reduce compliance costs for small taxpayers, especially in the unorganised sector. A presumptive taxation scheme is available for professionals having gross receipts not exceeding Rs. Fifty lakhs and for businesses having gross receipts not exceeding Rs. 2 crores in any year. Presumptive Income is computed at an assumed rate of profit which is 50% of gross receipts if such receipts are made by cash or cheque, or at 8% on turnover if such receipts are made by sale through electronic mode.

Progressive Tax

A progressive tax is a specific type of tax in which the rate of tax increases is called progressive taxes instead of flat taxes. For example, in a progressive tax, the tax paid will increase higher than the tax base or income increase. For the rate of tax decreases at a faster rate than the increase in taxable income, those with lower incomes will still be paying more in total than the higher-income earners. The latter has already paid a smaller proportion of their income. The progressive tax is thus regressive, which is why we call it that.

Conclusion

A tax base is an important element of a tax system, determining the relative size of the revenues to be raised. It is similar to the concept of GDP (gross domestic product). The government needs to invest in human capital rather than a direct capital investment to widen the tax base. The economy must grow; this should be encouraged by reducing tax rates. Implementation of a single sales tax will help in increasing consumption. 

The concept of tax base creation has been given greater prominence in the last two decades. The concepts of improving tax compliance and widening the tax base have recently been given more meaningful content.