Every year, just before the release of the annual budget, the discourse on abolishing personal tax gains its peak many economists argue that since only 1.46 crore people or roughly around 1.12% of the population pay income tax, the government should just do away with the system. Others argue that doing so will lead to a substantial loss in government revenues and will impact its programs to ensure equity in the society and providing amenities to the citizens. This debate calls for a ‘black’ and ‘white’ analysis of the issue and through this article, we attempt to analyse the various facets of the given proposal.
While presenting the 2017 budget speech, the then finance minister, Late Shri Arun Jaitley presented the statistic of less than 2% Indians paying their due income tax and mentioning how India is a major non-tax compliant economy. The poor are exempt from the tax, while the rich evade the tax, thus shifting the entire tax burden on the middle-class salaried citizens. This gave rise to a debate on the efficiency of continuing with the system of income tax.
Assuming the government does let go of the income tax system, what are the other avenues of revenue that remain? This is a pertinent question given that income tax receipts accounted to Rs. 5.6 lakh cores, approximately 25% of the government’s total receipts in 2019-20. In order to find alternatives, we look towards our middle-eastern neighbours like UAE, Saudi Arabia, Qatar, Kuwait etc. who have successfully implemented this policy. The most plausible alternative here is charging taxes on consumption rather than income. With a well-established and fully functioning GST structure, charging consumption taxes can be easy and will result in reducing red tape bureaucracy. Also, the government can charge higher levels of tax on sin goods like alcohol and tobacco, consumed by a fair number of people in the country.
Other than consumption-based taxes, the government can increase its excise duty rates given that the demand for low-cost Indian made products and services is becoming more and more inelastic, especially due to the high anti-china sentiments in the world. Further, custom duty rates can be increased which will serve the Atmanirbhar Campaign of the government. As MNCs and corporations look to shift their production bases from China to other countries with similar levels of production costs, India can use the proposed labor laws to its advantage by making them less stringent. Through this, foreign companies can be lured to invest in India in return of some marginally increased licensing fees and corporate tax rates to be charged from them. A part of this additional revenue charge could be used to compensate the laborers for their extra work, over and above the base pay which they usually receive. This will not only serve the purpose of bringing in foreign companies and generating employment, but also ensure the rights of the labour class. Further, the government can consider charging higher licensing fees from telecommunication companies in the auction of the 5Gspectrum since there is considerable market share occupied by two or three major companies who will go great lengths in expanding their position in the industry.
Further the government can look to generate IPOs of its not-so-strategic PSUs like LIC, the funds received from which can be used to invest in different securities and countries to generate additional revenue. All these steps can help to cover up the foregone income tax receipts and in-fact can help the government to increase surplus. If the income tax is abolished, then the 5.6 lakh crores will enter the economy in the form of savings and expenditure. Some of that amount will be spent in the economy, which will increase the GST collections and corporate tax receipts. While some part of it will be held in banks, leading to credit creation and infrastructure development in the country, and thus help in generating employment levels in the country. This method of taxation will have easier administration as compliance and checks will be easy when taxes are collected from firms at a micro level in the form of GST, given the fact that the GST filing process should be made a little easy for small businessmen.
The tax receipts from big corporate houses will be straightforward to generate as their accounts can be audited easily. Through investments, the government will be responsible for its own revenue, making it more efficient in handling financial resources and in the process, makes it more accountable to the citizens. But as rosy as it seems, this step will have its own limitations and complications. Firstly, the GST structure has to be made less complicated and small business houses have to be given proper training regarding GST filing. In addition to this, it becomes hard to convince people to pay GST on every purchase, given the fact that most of the consumers buy products without a receipt, thus evading the tax charged on these products.
Consumption based tax seems difficult to implement in a country like ours because it requires a change of mentality. It requires the combined support and consensus of the citizens along with a considerable duration of time. As far as the excise duty is concerned, increasing it will impact the country’s international relations and can discourage external trade. Moreover, the funds invested by the government in the open market will be subject to, apart from corruption, high market risks which may prove to be harmful to the country, if such investments were to go down due to some uncertain events in the market. Apart from these apprehensions, the biggest limitation will be that of voters’ and opposition’s reluctance which may prevent the government from taking such a step in the first place.
As famously said, “there’s no rose without a thorn”, this policy measure will also have its own merits and demerits. It is imperative that the government holds requisite parliamentary discussions regarding this step so as to gain public confidence and remove any hindrance associated with it through public debates. The removal of income tax has the potential to become the stepping stone for achieving the country’s target of becoming a $5 trillion economy within this very decade.
By Hardik KapoorA First year Undergraduate student at SRCC
While presenting the 2017 budget speech, the then finance minister, Late Shri Arun Jaitley presented the statistic of less than 2% Indians paying their due income tax and mentioning how India is a major non-tax compliant economy. The poor are exempt from the tax, while the rich evade the tax, thus shifting the entire tax burden on the middle-class salaried citizens. This gave rise to a debate on the efficiency of continuing with the system of income tax.
Assuming the government does let go of the income tax system, what are the other avenues of revenue that remain? This is a pertinent question given that income tax receipts accounted to Rs. 5.6 lakh cores, approximately 25% of the government’s total receipts in 2019-20. In order to find alternatives, we look towards our middle-eastern neighbours like UAE, Saudi Arabia, Qatar, Kuwait etc. who have successfully implemented this policy. The most plausible alternative here is charging taxes on consumption rather than income. With a well-established and fully functioning GST structure, charging consumption taxes can be easy and will result in reducing red tape bureaucracy. Also, the government can charge higher levels of tax on sin goods like alcohol and tobacco, consumed by a fair number of people in the country.
Other than consumption-based taxes, the government can increase its excise duty rates given that the demand for low-cost Indian made products and services is becoming more and more inelastic, especially due to the high anti-china sentiments in the world. Further, custom duty rates can be increased which will serve the Atmanirbhar Campaign of the government. As MNCs and corporations look to shift their production bases from China to other countries with similar levels of production costs, India can use the proposed labor laws to its advantage by making them less stringent. Through this, foreign companies can be lured to invest in India in return of some marginally increased licensing fees and corporate tax rates to be charged from them. A part of this additional revenue charge could be used to compensate the laborers for their extra work, over and above the base pay which they usually receive. This will not only serve the purpose of bringing in foreign companies and generating employment, but also ensure the rights of the labour class. Further, the government can consider charging higher licensing fees from telecommunication companies in the auction of the 5Gspectrum since there is considerable market share occupied by two or three major companies who will go great lengths in expanding their position in the industry.
Further the government can look to generate IPOs of its not-so-strategic PSUs like LIC, the funds received from which can be used to invest in different securities and countries to generate additional revenue. All these steps can help to cover up the foregone income tax receipts and in-fact can help the government to increase surplus. If the income tax is abolished, then the 5.6 lakh crores will enter the economy in the form of savings and expenditure. Some of that amount will be spent in the economy, which will increase the GST collections and corporate tax receipts. While some part of it will be held in banks, leading to credit creation and infrastructure development in the country, and thus help in generating employment levels in the country. This method of taxation will have easier administration as compliance and checks will be easy when taxes are collected from firms at a micro level in the form of GST, given the fact that the GST filing process should be made a little easy for small businessmen.
The tax receipts from big corporate houses will be straightforward to generate as their accounts can be audited easily. Through investments, the government will be responsible for its own revenue, making it more efficient in handling financial resources and in the process, makes it more accountable to the citizens. But as rosy as it seems, this step will have its own limitations and complications. Firstly, the GST structure has to be made less complicated and small business houses have to be given proper training regarding GST filing. In addition to this, it becomes hard to convince people to pay GST on every purchase, given the fact that most of the consumers buy products without a receipt, thus evading the tax charged on these products.
Consumption based tax seems difficult to implement in a country like ours because it requires a change of mentality. It requires the combined support and consensus of the citizens along with a considerable duration of time. As far as the excise duty is concerned, increasing it will impact the country’s international relations and can discourage external trade. Moreover, the funds invested by the government in the open market will be subject to, apart from corruption, high market risks which may prove to be harmful to the country, if such investments were to go down due to some uncertain events in the market. Apart from these apprehensions, the biggest limitation will be that of voters’ and opposition’s reluctance which may prevent the government from taking such a step in the first place.
As famously said, “there’s no rose without a thorn”, this policy measure will also have its own merits and demerits. It is imperative that the government holds requisite parliamentary discussions regarding this step so as to gain public confidence and remove any hindrance associated with it through public debates. The removal of income tax has the potential to become the stepping stone for achieving the country’s target of becoming a $5 trillion economy within this very decade.
By Hardik KapoorA First year Undergraduate student at SRCC
