Budget 2018: Should income tax be abolished in India by FM Arun Jaitley?

Budget 2018: Some industry experts are in favour of abolishing the income tax in India, largely because of the failure of the current system. However, is it a good idea to abolish income tax?

Will abolishing income tax in India be a good idea?
Budget 2018: What would be your reaction if taxes are abolished altogether by the government? Wouldn't it be a dream come true for you?

Budget 2018: Nothing is certain in this world except death and taxes, as the famous saying goes. So, what would be your reaction if taxes – even if only the income tax – are abolished altogether by the government? Wouldn’t it be a dream come true for you? For, you won’t be required to pay any tax to the government on your income, nor will you be required to file any I-T return or worry about any notice from the Income Tax Department for delayed filing or any mismatch in the income tax return!

Strangely, some tax and industry experts are also in favour of abolishing the income tax in India, largely because of the failure of the current system. Even BJP leader and Member of Parliament, Dr Subramanian Swamy – delivering the 98th ASSOCHAM Foundation Day lecture in New Delhi recently – had said that one of the important ways to put the economy on a double digit expansion mode would be to “raise savings and abolish the Income Tax.” According to Swamy, domestic savings and not foreign investment can take the Indian economy on a 10 per cent growth path, for which income tax must be abolished and interest rates on fixed deposits be raised to 9 per cent along with the reduction in the banks’ Prime Lending Rates.

However, is it a good idea to abolish income tax? A majority of experts don’t think so. “Government needs tax revenues to meet demands of different stakeholders in the economy, and also to meet its larger socio-economic development agenda like infrastructure development, healthcare, education etc. Today, income tax revenues constitute a large portion of the overall tax collections. Therefore, if the income tax is abolished, then the consequential shortfall in income tax revenue has to be met through other sources like GST,” says Vikas Vasal, National Leader-Tax, Grant Thornton in India.

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In such a situation, it would put a lot of pressure on the government to increase GST rates, which is not feasible in the current situation, as it could lead to inflation and further disrupt economic growth.

Therefore, at present, it may not be feasible to abolish income tax completely. “Instead, we should aim at lowering the income tax rates and simplify the tax compliances, make interaction between the tax payer & tax authorities more user friendly. This will go a long way in improving India’s image vis-a-vis Ease of Doing Business and as an investor-friendly tax jurisdiction,” says Vasal.

Also Read: Budget 2018: Why FM Arun Jaitley should introduce standard deduction in India again 

According to financial experts, income tax should not be abolished in India currently also because of the following reasons:

1. Low Tax to GDP Ratio: Since a very minuscule part of the population pays income tax, there is a pressing need to widen the tax base. Abolishing income tax would reduce the tax to GDP ratio even more.

2. Increase disparity: Abolishing income tax would make the rich more prosperous and reduce the amount available with the government to support welfare schemes and agricultural prices. This would result in further widening of the already very high income disparity.

3. There is no reference to predict the impact: There is no other large economy which does not levy income tax or had undertaken the experiment of abolishing this tax. “Hence the impact of abolishing income tax cannot be ascertained as there can be no comparable case study on this. Moreover, once abolished, it will be extremely difficult and unpopular to reintroduce this,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

Hence despite all the difficulties in collecting tax and the harassment faced by tax payers, income tax is required to augment government resources as well as reduce economic inequality in our society. “Need of the hour is to improve compliance, reduce corruption and make the process more tax-payer friendly. E-assessment is one such move which should reduce corruption and harassment as well as increase compliance. More such measures should be introduced rather than abolishing income tax,” says Kapur.

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