Domestic brokerage Equirus has suggested abolishing the advance tax system to free up roughly ₹10 lakh crore in corporate working capital. The firm also proposed gradually reducing small-savings schemes to help capital flow into market-priced bonds. These policy ideas aim to boost economic efficiency but could face significant implementation hurdles if considered by the government.
Domestic brokerage firm Equirus has released a research report advocating for structural changes to India’s taxation and savings framework. The proposal, part of the firm's broader vision for the country's economic growth, suggests that removing the advance tax system could unlock approximately ₹10 lakh crore in working capital for businesses.
Advance tax is the system where companies and taxpayers must pay a portion of their estimated annual tax liability in quarterly installments before the financial year ends. Equirus argues that this system effectively compels businesses to prepay taxes on income they have not yet earned. If a business faces a weak quarter after paying these taxes, the current system can penalize them with interest charges for inaccurate estimates. The report notes that major economies, such as the United States, the United Kingdom, and China, do not operate on this quarterly payment structure for ordinary taxpayers.
Beyond just simplifying tax compliance, the brokerage points to the issue of government tax refunds. As the current system involves collecting taxes based on estimates rather than actual realized income, it often leads to over-collection, resulting in a substantial annual bill for tax refunds that has reached over ₹4 lakh crore. By moving away from this system, the firm argues that businesses could utilize the locked-up capital for productive economic activities rather than waiting for refunds from the government.
The report also touches on small-savings schemes, such as the Public Provident Fund (PPF) and the Senior Citizens' Savings Scheme. Equirus suggests a gradual tapering of these programs. Currently, the government sets administered interest rates for these schemes, which often remain higher than the yields on market-priced government bonds. This creates an artificial pricing floor, which the report argues distorts the bond market and diverts capital away from where it could be priced more efficiently. The firm proposes that shifting a portion of these funds toward market-priced bonds could provide a boost to capital markets.
While these proposals aim to improve economic efficiency, they also highlight significant policy challenges. Advance tax collections currently form a major part of the government’s direct tax revenue, and removing this mechanism could disrupt fiscal cash flows, creating temporary challenges for the government’s budget management. Furthermore, small-savings schemes are critical investment vehicles for millions of retail investors and senior citizens who prioritize safety and stable returns. Any significant change to these schemes would likely face strong political and social resistance due to the reliance of the middle class on these guaranteed-return products.
It is important for market observers to note that these suggestions are currently research proposals from a private brokerage firm and do not reflect any immediate shift in government policy. The next steps for investors or economic watchers would be to track whether these ideas gain traction in future policy discussions or if the government maintains the existing tax and savings frameworks to ensure revenue stability.