Equirus Advocates for Abolishing Advance Tax and Gradual Reduction of Small-Savings Schemes to Boost Economic Growth

Abolishing the advance tax system could release about ₹10 lakh crore of working capital for productive use, according to a report by Equirus. The advance tax requires businesses to prepay taxes on income before it is earned, potentially penalizing them if their financial performance declines in subsequent quarters. This report argues that doing away with this system would not amount to a revenue loss, as taxes would still be paid upon annual filing but would remove the burden of multiple compliance events throughout the year. The advance tax currently comprises approximately 35-45% of gross direct tax collections, illustrating its significant impact on cash flow for businesses.

For the common citizen and the market, this proposed change represents a potential improvement in liquidity and business investment. The estimated release of ₹10 lakh crore could enhance operational capabilities for companies, fostering greater economic growth and job creation. Additionally, the phasing out of small-savings schemes could lead to a more efficient allocation of capital, as funds may be redirected into market-priced bonds, which could, in turn, stabilize interest rates and encourage better investment climate in the bond market. The common savers using schemes like PPF and the Senior Citizens’ Savings Scheme may initially face concerns about rate stability, but the anticipated financial growth could ultimately facilitate higher returns across the board.

In terms of long-term outlook, the government and RBI may need to carefully manage the transition to ensure that the financial market absorbs the influx of capital from abolished small-savings schemes. A gradual tapering off will ensure that traditional savers are protected while redirecting flows into the corporate bond market. This initiative may also signal the government’s commitment to improving fiscal efficiency and simplifying the tax structure, moving towards a more market-driven economy. The success of these changes will likely hinge on effective modeling and incentives that maintain financial safety nets while promoting investment and growth, as India aims for its aspirational $20 trillion economy by the end of the decade.

Source: The Hindu

(Expert Note: This report was independently prepared by the Wealthova Economy team.)