1. Abolishing personal income tax a good idea, but India just not ready yet

Abolishing personal income tax a good idea, but India just not ready yet

Only 2.4 per cent Indians paid income tax in the last financial year 2015-2016. The meager percentage of taxpayers in India is good enough for many economists to argue against the regressive personal income tax.

By: | Updated: September 20, 2017 11:36 AM
tax collection this fiscal, this fiscal tax collection, expenditure fall, icra The meager percentage of taxpayers in India is good enough for many economists to argue against the regressive personal income tax.

“India has become largely a tax non-compliant society.” This statement by the Finance Minister Arun Jaitley during his Budget speech earlier this year was not a mere rhetoric. The income tax figures substantiate the argument. Only 2.4 per cent Indians paid income tax in the last financial year 2015-2016.

While 3.7 crore individuals filed income tax returns, 99 lakh of those claimed the yearly income below the exemption limit of Rs 2.5 lakh, leaving just 2.81 crore individuals who actually paid tax. Of these 2.81 crore individuals, mere 24 lakh people showed income above Rs 10 lakh, with only 1.72 lakh reporting an income of above Rs 50 lakh.

Taxing the middle

The meager percentage of taxpayers in India is good enough for many economists to argue against the regressive personal income tax, in which the middle-income group or the salaried class takes the maximum burden, the rich find ways to evade it, and the poor are exempted from it. Of the total 2.81 crore taxpayers, 2.47 crore people earned below Rs 10 lakh or belonged to the middle-income group.

What one can infer clearly from the income tax data is that the middle-income group bears the maximum burden of the tax, while the rich find ways to evade it, and hoard it as black money or in form of assets. Moreover, nearly 90 per cent of India’s employment is in the informal sector. A lot of those people, even while earning enough to fall in the tax bracket, escape the tax net because their incomes are not recorded.

There might be gains…

Many economists, including ruling party leader Subramanian Swamy, argue that abolishing the income tax will make the cash white, and unnecessary holding of assets like gold and real estate property will go down. Reason: People would either start spending or investing money, which they were paying as taxes or were trying to hide from the authorities. Both ways, the cash will flow into the economy accelerating growth. Bank deposits will rise, and as a result, the interest rates will come down, further accelerating industry investments. More industry investments will lead to more employment opportunities.

Albeit, the reform will demand a lot in return. First, it will drastically bring down government revenues; secondly, there is no concrete alternative proposed so far which could help the government meet the revenue shortfall. In the year 2015-2016, the government collected Rs 2.87 lakh crore. If the income tax is abolished, the government will have to — at least — recover this amount to prevent an economic crash either through indirect taxes or other alternatives. So far, the alternatives that are being suggested are at best theoretical and abstract.

Subramanian Swamy says spectrum and coal auction could be a source of government revenues. Another alternative could be of levying taxes on expenditure and bank transactions instead of income. This will need drastic economic reforms like the GST, which is going to take a lot of time, effort and support from all stakeholders. 

… but costs would be higher

Care Ratings Chief Economist Madan Sabnavis does not think abolishing personal tax is a feasible option. The current taxation system is robust, in which each individual pays tax on the basis of ability, Madan Sabnavis says, while raising the question that what would be the revenue model if the income tax is abolished. “If the tax is levied on bank transactions, it will be messy. Who will monitor the transactions for consumption and the transactions for saving?” Madan Sabnavis said in an interview with FE Online. “The current taxation system is equitable and progressive,” he added.

While India debates whether or not to abolish the income tax, there are only ten countries which do not levy a personal income tax, namely, Qatar, Oman, Saudi Arabia, UAE, Bahrain, Kuwait, Bermuda, Cayman Island, Bahamas and Monaco. Interestingly, six of them are oil-rich countries, and earn a majority of revenues from oil trading. The other four are island nations, and have repeatedly figured in conversations about tax evasion.

While doing away with the income tax may seem to be a good idea in theory, the nation seems to be far away from being fully prepared to make up for lost revenues and to build as robust an indirect tax system. 

(First published on Tuesday, September 19, 2017, on www.financialexpress.com)

  1. S
    S B
    Sep 28, 2017 at 10:43 am
    First of all, instead of abolishing Income Tax, the Govt could begin with gradually reducing the rate of personal income tax, by few percentage point every year. The annual cut in tax rate should be such that despite the reduced rate, the actual growth of tax revenue under the personal income tax just about remains same each year. This way the share of receipts under personal income tax in the gross revenue of Govt goes down ultimately reducing it to very miniscule share, Let the Govt judge if it can manage it's expenses with decreasing contribution from personal income tax to it's gross income. If the situation gets difficult the govt can always pause any further cuts in personal income tax rates.
    Reply
    1. B
      bp sharma
      Sep 20, 2017 at 7:41 pm
      No taxation a tall will serve the purpose, instead rate of income tax brought down to a much lower lever of 7 to 10 percent with no exemption for all categories of citizens with making addhar, pancard linkage to all transactions, that is bank transaction of any amount, purchase of property and all kind of goods and services. This will clearly show as to how much in a year you have spent matched with the income tax. Pre 2004 govt servants are paid pension and other amounts at the time of retirement and are a trained lot, should be brought into system for monitering the tax regeime so that they earn their pensions by doing fruitful work. Not only that they should also be engaged in govt activities such as election duties, counselling, traffic management. This will not only keep them busy doing fruitfull work but also save in terms of new employment. Govt servants cons ute on 1 of the total population therefore reduction in their ranks in will not affect unemployment.
      Reply
      1. C
        Chvramanaiah
        Sep 20, 2017 at 1:57 pm
        Idea is welcome.But instead of waiving fully it is suggested that the exemption slab limit may be enhanced to Rs 30lacs , over and above the said limit could be brought under tax purview so that that category can afford .On the other hand people will be more happy.
        Reply
        1. S
          sonia
          Sep 20, 2017 at 12:52 pm
          Ofcourse India is not ready yet to abolish personal income tax. After all, who will keep paying for all the shortfalls in different budgets caused by the neta-babu-top businessmen-financiers nexus? Those nexuses are bent upon making law-abiding tax payers keep paying more and more and more until they have nothing more to offer, just as long as 'they' (the general public) can pay, let them keep paying. Isn't that the government's extortionist motto (irrespective of which political party is in power)? While those nexuses don't pay a penny and get away with EVERYTHING!
          Reply
          1. R
            ram
            Sep 20, 2017 at 11:43 am
            Its a nice idea --govt can increase indirect taxes to compensate the loss in revenue
            Reply
            1. M
              Manish
              Sep 20, 2017 at 9:20 am
              Unless ideas of the current and future government match, no transition to better taxation system can occur. And party system for government and parliament ministers is not beneficial to all citizens.
              Reply
              1. P
                Prof. H.
                Sep 20, 2017 at 12:42 am
                Personal income tax may continue. But education and efficient health care be made free in a phased manner. In a study conducted, an Indian family at an average spends now twenty to thirty thousand rupees per annum for each child's education upto school final level. Similar is spending in lakhs for major ailments especially for aged in each family. Many countries have made both the above free.
                Reply
                1. N
                  N srinivasan
                  Sep 19, 2017 at 9:27 pm
                  To start with income tax may abolished or ceiling may be raised to 5 lacks per annum to individuals ! This will help individuals as well the department which is doing a lot of work for a m eagre amount of tax collection !
                  Reply
                  1. Govindarajan Gopalakrishnan
                    Sep 19, 2017 at 8:00 pm
                    How much is contributed by the MIG (2..47 croe individuals) to the total income tax collection and what do they get in return except humiliation in all fronts? Has not our great PM' got any new means of bringing hardship to the people like what he did in past year?
                    Reply
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