Arun Jaitley hints at lower taxes following demonetisation, but here's why it may not happen

Jaitley says demonetisation would enable the government to make taxes more reasonable with both direct and indirect taxes involved.

Union Finance Minister Arun Jaitley on Tuesday managed to give salaried individuals a glimmer of hope amid all the gloom projected round the demonetisation move, dropping hints of an easier tax regime if tax collection continues to rise and black money is significantly reduced. He also slammed former Finance Minister P Chidambaram over his remarks that demonetisation was the "biggest scam of the year."

Replying to Chidambaram

The primary purpose of Jaitley's address on Tuesday seemed to be to slam Chidambaram for his barbs at demonetisation. "The Congress party was in power for 10 years continuously from 2004 to 14. There were two striking features of that regime. The first that it did not take even a single step either against corruption or against black money. The second as far as corruption scandals were concerned, it peaked during that period," the Finance Minister said.

"So, from 2G scandal to coal block [allocation], CWG, VVIP helicopter AgustaWestland deal, each of the scandals, which is even today discussed in public space, belongs to that period. Given this scandalous record, it is not surprising that the Congress is extremely uncomfortable with anti-corruption campaign that the NDA government led by Prime Minister Narendra Modi has launched," he added.

Easier tax regime, and why it may not come to pass

Speaking on demonetisation and its effects, Jaitley said: "Future transaction would be substantially digital and once they are substantially digital, they would come in the tax net. Therefore, the future taxation level would be much higher than what is currently being collected. This would also enable the government at some stage to make taxes more reasonable which will apply to both direct and indirect taxes."

However, even if tax collections rise, the Central government may not be too keen to pass on the benefits to the salaried class or entrepreneurs in the form of lower taxes, primarily because it might want to use all that extra money to provide sops and freebies that would buy it political mileage and lead to electoral gains.

And even if taxes were lowered, the tax cut would not be too significant, but a token one which the ruling party or coalition might want to use as a backup election issue, parading it as a people-friendly or populist move.