The Economic Survey on Friday said the government should refrain from raising exemption limits on income tax to facilitate natural growth of individual earnings and widen the taxpayers’ base, even as it also suggested increasing property tax.

The Economic Survey 2015-16, tabled in Parliament on Friday, also called for a review and phasing out of the tax exemption raj that benefited the richer private sector and a “reasonable” taxation for better-off individuals.

A cross-country comparison shows that India currently has the lowest number of taxpayers, it said, adding that nearly 85 per cent of the economy still remains outside the tax net.

“Just 5.5 per cent of earning individuals are in the tax net and the ratio should be raised to a desirable estimate of about 23 per cent,” it said.

Making a study of the data since Independence, the Survey said that the exemption thresholds have been raised much more rapidly than underlying income growth resulting in a widening of wedge between average income and threshold limit.

“One of the low hanging fruit would be to refrain from raising exemption thresholds for the personal income tax, allowing natural growth in income to increase the number of taxpayers. In some ways, this would be reform through inaction,” the Survey said.

It said that subsidies amounting to Rs. 1 lakh crore paid to well-off need to be scaled back. Also tax exemptions raj which often amount to redistribution toward the richer private sector will also need to be reviewed and phased out.

“Reasonable taxation of the better-off, regardless of where they got their income from — industry, services, real estate or agriculture — will also help build legitimacy,” the Survey added.

It also suggested that property taxation needs to be developed as sparse systematic data on property taxation shows how little attention has been given to this tax.

“Property taxes are especially desirable because they are progressive, buoyant and difficult to evade, since they are imposed on a non-mobile good which can be relatively easily identified,” it said.

Making a case for “higher property tax rates”, the Economic Survey said it would put sand in the wheels of property speculation.

“Smart cities require smart public finance and a sound property taxation regime is vital to India’s urban future,” the Survey added.

It said India has not fully translated its democratic vigour into commensurately strong fiscal capacity. “In long run, if India is to stay ‘on the line’ as its per capita income grows, it will need to build fiscal capacity.”

The Survey also said the government’s spending priorities must include essential services that all citizens consume: public infrastructure, law and order, less pollution and congestion.

It said the state should prioritise on reducing corruption and government’s effort to improve transparency through transparent and efficient auctioning of public assets will help create legitimacy and over time strengthen fiscal capacity.

The Survey said economic development in India lags political development.

“Independent India has averted famines, but chronic malnutrition is still a challenge. The Indian state can organise mega events, but routine safety for women has turned out to be more difficult to achieve. The Indian state responds effectively to floods and tsunamis but finds water and power metering more challenging,” it added.