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Taxation- A Tool to Rebuild India?

The mammoth task of restarting the economy looms over India.

The Coronavirus has been rightly termed as a ‘simultaneous health and economic crisis’. While millions of Indians under lockdown are under the hopes of flattening the curve, the economy has come to a grinding halt.

India was initially quick to respond with the introduction of tax policy measures designed to ease the blow of the lockdown. In March, the Finance Minister rolled out tax compliance relaxations and other similar measures. These were primarily aimed at giving temporary respite to taxpayers and boosting liquidity.

These steps were regarded as appropriate. And so far it seems that the government has avoided the permanent distortion of our already complex tax framework.
Could taxes help rebuild India post Covid-19?

The Inherent Limitations of Tax Policies

First of all, it is necessary to understand the conundrum that our policymakers are facing. The government is facing a sharp decline in tax collection- which constitutes a major portion of its revenue. This is due to a combination of a few factors:

Along with this, the government expenditure has risen exponentially. The need to finance Coronavirus related expenses such as testing, treatment and cash hand-outs are of utmost importance. 

It is apparent that despite the efforts to resume economic activity, once the lockdown is lifted, international and domestic trade is likely to witness a slow recovery. It is thus crucial to temper our expectations and accept the limitations of tax policies in such situations:

Planning Points

Despite all these limitations, tax policies pay a crucial role in influencing public behavior and financing public expenditure. Let’s look at how taxes can play an important role to rebuilt the economy post Covid-19.

Next Steps


In deciding whether to impose a new levy or any such complicated tax policy that would require restructuring, one must bear in mind the administrative capabilities due to the ongoing health crisis.

Any change that imposes a new levy or adds an additional tax burden must ensure a progressive tax framework.

To optimize tax collection, it is crucial that India invests in leveraging technology to digitize compliance, administration and enforcement processes. This would boost the taxpayer morale by making compliance less troublesome. It would also minimize corruption and ensure transparency and help to maximize tax collection. 

According to the United Nations Conference on Trade and Development, investment from developing countries during the Coronavirus crisis has been reportedly withdrawn at a faster rate than during the global financial crisis of 2008. Therefore, avoiding shocks and granting businesses a sense of stability and certainty in these confusing times should also be a priority for our tax policymakers. 

Gradually lifting the short-term relaxations in the mitigation phase and ensuring that no hasty decisions are taken to impose additional tax burdens would go a long way. 

In these uncertain and unprecedented times tax policymakers must try hard to strike a balance between incentivizing economic transactions through tax breaks, while maintaining a steady stream of revenue.

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