Is India Yet Ready for Abolishing Personal Income Tax?

Mr Arun Jaitley, the Indian Finance Minister’s statement that India has become a largely tax non-compliant society during his budget speech is not only rhetoric. The number of people filing the ITR in India is low. 

Even out of those numbers, a large number of people are those who are below the Rs.2.5 lakh per year exemption. Hence, only a small portion of people earning above Rs.10 lakh paid taxes through Form 16, Challan 280 (used for for online income tax filing).

The lower percentage of taxpayers in India is good enough for many economists to debate against the regressive income tax. It is because, in it, the middle-income group or the salaried class takes the brunt of the taxes in India. The rich find ways to keep them safe while the poor are exempted from it. 

What’s more, more than 90% of India’s employment is in the informal sector. As a result, a lot of people even after earning substantial income evade the tax. Why? It’s because their income is not recorded. 

Abolishing the Taxes may have Gains and Losses

Many economists including the Member of Parliament in the Indian ruling party Mr Subramanian Swamy argue that abolishing the taxes will have gains. As per his perception, abolishing the income tax will make the cash white. As a result, the unnecessary holding of assets such as real estate and gold will go down. 

The reasons – people would begin spending or investing money, which they were paying as taxes or were trying to keep away from tax authorities. As a result, the cash will start flowing into the economy in both ways leading to growth acceleration.

The scenario will lead to an increase in the opening of bank deposits. And that will lead to the lowering of the interest rates leading to investments in industries. Therefore, enhanced industry investments will pave the way for many employment opportunities.

However, in turn, the income tax abolishment reform will demand a lot more in return. The first impressions of the income tax abolishment will be on the Government revenues as it will bring it down drastically. The next thing is that in India, there is no alternative proposed so far to manage the revenue shortfall. 

Subramanian Swamy suggests that spectrum and coal auction could become a good source of revenues for the Government. 

Another measure would be levying taxes on bank transactions and expenditures. However, but that will take time for the proper implementation of GST. It is currently not yet properly implemented and hence, would need support from all stakeholders.

Reasons the Income Tax System in India can’t be Abolished 

According to Chief Economist Madan Sabnavis, the personal tax abolishing is not a feasible option in India. Mr. Madan has said that our taxation system that currently exists is robust, in which the tax is paid according to ability, means every individual in our tax system pay the tax according to their tax ability. When the revenue model got observed, there a little confusion was found that if the personal tax system got abolished then what will be the revenue model of this tax system. According to Mr. Madan, our current taxation system is equitable as well as progressive also, so when we apply the taxes on transaction then it will be messy because it will be then difficult to manage these bank transaction.  

Around the world there are only ten countries where personal tax has been abolished. Out of ten six countries are rich because they produce the oil so their revenue models are managed due to oil trading. The name of these countries are Onam, United Arab Emirates, Qatar, Kuwait, Saudi Arabia, UAE, Bahrain, Kuwait, Bermuda, Bahamas and Monaco. Besides these ten countries there are other four islands.

Unless there is some concrete plan made to help the Government make up the loss due to tax abolishment, income tax should be active in India. Here are some quick reasons why it can’t be abolished in India: 

Reason 1: Lower Tax to GDP Ratio 

As discussed earlier that only a minuscule portion of the Indian population pays the personal income tax. Hence, it is crucial to widen the base of the tax and bring more people into the regime. Hence, if the income tax system India gets abolished, it will surely lead to a decrease in tax to GDP ratio. 

Reason 2: Enhanced Inequality

The abolishment of income tax in India will also lead to many unforeseen circumstances. It will be beyond anyone’s control making rich even richer. It will leave the Government with lower revenue to invest in public welfare schemes and others. As a result, it will pave the way for the widening of an already wide income disparity. 

You are now aware of the losses and gains of the income tax abolishment in India. If you want to calculate your income tax easily, you can use the income tax calculator. It is an online tool available at many financial websites for your use.