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Why abolishing personal income tax may not be a good idea
September, 20th 2017

“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.
Subramanian Swamy says spectrum and coal auction could be an alternative for 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 would not be easy to bring.

… 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 taxation 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.

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