Taxation
Time to question relevance of personal income tax
Finance Minister Arun Jaitley put the spotlight on the issue of tax evasion in his February 1 budget speech with some eye-opening statistics. Out of an employed population of approximately 300 million, merely 37 million filed their income tax returns in 2015-16. Even if exempted sectors like agriculture are accounted for, this proportion is abysmally low.
 
The most damning evidence of evasion was the fact that out of 7.6 million individuals who declare incomes above Rs 5 lakh, 5.6 million are in the salaried class, for whom the taxes are deducted at source. Clearly, it cannot be the case that India has only two million businessmen and self-employed people who earn incomes above Rs 5 lakh. Tax evasion is rampant in the country and is especially high among the non-salaried class.
 
The facts in the Budget underline the unjust nature of the imposition of income tax in the country. The honest taxpayer is simply discriminated against. This happens in two ways. First, in Jaitley's own words, "When too many people evade taxes, the burden of their share falls on those who are honest and tax-compliant." Second, the complicated filing procedures and undue harassment later impose an additional shoe-leather cost on the person paying taxes. These issues create incentive problems among taxpayers. It is in the payer's best interest to find ways to avoid taxation.
 
The constitution's promise to treat every citizen equally before the law fails to hold in the case of such unjust tax laws. When the constitution was formulated, nobody could foresee that such laws would always keep the honest taxpayer on edge. While filing returns, the person has to present pages after pages of evidence that carry his earnings, expenses and rebates to a hired accountant because the process is simply so arcane and complicated for a layman to handle.
 
The problems do not end after the process is complete. There are recurrent situations where years after an honest return, people are arbitrarily commanded to appear before an investigator to present evidence that has long been destroyed or misplaced. In the case of failure to do so, the said investigator declares that the taxpayer would be re-taxed on the said return. Generations of good citizens have been at the mercy of an army of tax collectors and auditors that presume a taxpayer guilty until he proves his innocence.
 
The discrimination against honest taxpayers has resulted in the ballooning problem of tax evasion that has led to India's tax to GDP ratio being as low as 5.47 per cent in 2015-16. By comparison, China has a tax to GDP ratio of 9.7 per cent while the US ratio stands at 11 per cent.
 
Such a dismal state of affairs calls for radical change. The demonetisation drive might have helped the tax authorities get many people on their radar, but the inherent, flawed incentive mechanisms will encourage people to find ways to evade imposition of taxes in the future as well. Tax reforms need to eliminate all incentives to practise non-compliance.
 
An interesting proposition is to eliminate the imposition of income taxes altogether. There are numerous advantages from such a move. First, it will make a large proportion of black money white. This would bring the horde of funds stored in foreign banks back to the country and in circulation. Second, it would increase the disposable income of the honest taxpayers and boost consumption and investment of the country. Third, the savings rate would see a push as people deposit more money in banks to earn higher interest instead of storing it in cash or fixing it in gold.
 
This should boost private investment and mellow the non-performing assets (NPA) problem that the banks are currently facing. It would also reduce our gold import bill and strengthen the rupee. Finally, it would also improve efficiency in the economy. People wouldn't need to spend unproductive hours with their accountants figuring out ways to evade taxes. Also, the bureaucratic process and the harassment that comes along with it would be eliminated. It would also reduce a source of corruption in the economy.
 
The biggest criticism of such a move would be the resulting loss of revenue. However, income tax is not a strong revenue-generating mechanism for the government as merely two per cent of Indians comply with it (compared to 53 per cent in the US). Also, a loss of over Rs 3 lakh crore that the move would entail can be easily replaced with much more efficient mechanisms. A banking transaction tax can be considered. A small tax on any banking transaction in an economy can vastly increase the government's tax base and revenue compared to the current inefficient method.
 
There are various steps that can be taken to eliminate the inefficiencies that are inherent in the current system of taxation in India. Its incentive structure needs to be corrected and replaced with an innovative mechanism that is non-discriminatory and aligned with the country's constitutional principles. It is high time we question the relevance of the personal income tax. 
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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COMMENTS

Pramod Bhave

4 months ago

very interesting data.the salarird class has become the beast o burden.it is time that the finance minister starts looking for taxing the rich businessmen and farmers.the transaction tax can be devloped over a time span to replace the income tax.

Mahesh Bhattad

5 months ago

A point worth considering, but the disadvantages need to be thought through thoroughly. Saying that "income tax is not a strong revenue-generating mechanism for the government" and giving out the tax base number is correct. The income tax number should be compared to total government revenue. Even if just 2% of the population pay income tax, it currently amounts to roughly 3 lakh crores, while total revenue of government is roughly 17 lakhs crores. So wiping that out would mean losing out on approx. 18% of total revenues (and approx. 25% of central governments revenue), which is a big number and should be planned properly.

Income tax in its current form also provides a way for government to influence people's behavior by way of providing incentives. Any replacement of personal income tax should also take this into consideration.

Banking transaction tax does not serve a good replacement. It would just ensure that people continue to store money in cash and gold and avoid going to the bank, maybe this might weaken banking sectors position in the economy.

Recouping the revenue loss by way of indirect taxes (tax on petrol/diesel, service tax, excise duties etc.) is a potential solution, but it then taxes the rich and poor equally and it becomes a very sensitive topic for the government, thus not providing much motivation for it to consider such a move.

Finally, income tax abolishment cannot be thought about in isolation. It needs to be part of a holistic approach where government identifies and acts upon ways to reduce its expenditure. This would help it deal with potential loss of revenue in a meaningful way without impacting fiscal deficit. However current decisions by the government do not provide much confidence in it being interested in reducing its expenditure.

The issue deserves more thoughtful analysis. In its current form, it appears as mere wishful thinking.

Simple Indian

5 months ago

Yes, it is true that for decades, the TDS-deducted salaried class has been compensating the rest of the population, including rich crorepati "farmers" on paying income tax. India should have learned from other major economies which keep income tax rates high but also ensure it is complied with. India's Income Tax Dept officials are not exactly known for adhering to the rule-book, enriching themselves in the process of enforcing tax-compliance. Moreover, many developed countries manage to get their citizens comply with high income tax rates, but also provide excellent welfare schemes taking care of education, health, unemployment dole, old age pensions, etc. making citizens comply with high tax rates, as it gives them a sense of getting 'value' for their money. In India, it is better to keep income tax rates low or abolish it altogether and levy higher indirect taxes on goods & services (consumption) so that everyone availing of certain goods & services pays the same tax rates, hence there's no question of evasion. If GST is rolled out in July 2017 as planned by the PM/FM, and it stabilizes by next Feb, we can expect the PM/FM to further lower income tax rates in the next budget.

Mehernosh Dordi

5 months ago

It should be done as the advantages outweigh any disadvantages.

Suketu Shah

5 months ago

I see this happening once NaMo wins Lok Sabha elections 2019 with 400/540 seats ie Budget 2020.BTT wl be a hugh game changer first advoctaed by Dr Swamy.Cheers.

Abhay Roy

5 months ago

Not a right advice actually. Banking transaction tax does not make any sense. You are trying to solve a problem while creating it again. Personal Income Tax compliance will increase only when there will be a fear of penalty for non-compliance. There is no short-cut. We in India are now trying to find short-cuts because we are not able to enforce law.

S A Narayan

5 months ago

The entire bureaucracy behind the Income Tax setup would surely resist and I dont see any Govt has the will or guts to do it!

Deepak Agrawal

5 months ago

Why have so many taxes? just scrap income tax and increase GST rate suitably. I know economists will cry that its regressive but it's practical, saves countless unproductive manhours in tax planning & evasion. As far as tax regression is concerned, DBT is taking care of that. One can also introduce universal basic income to take care of this.

Abhijit

5 months ago

My 2 cents for banking transaction tax-
1. Will it not discourage people to transactions through bank? leading to black economy?
2. Honest tax payer who already paid income tax, saved for years, again has to pay tax when he is spending? ( apart from sales tax or any other tax)

ramchandran vishwanathan

5 months ago

Interesting article. Apparently Dr.Swami who is in BJP now has been advocating this . One needs guts , determination & self confidence to do this. I dont think our nominees in the Government have any of the 3 qualities . The honest taxpayers will continue to be left in the lurch . I wish we get a citizens group and file a PIL to move this .

Burglars decamp with Satyarthi's Nobel Prize certificate
An unknown number of burglars broke into Nobel Laureate and social activist Kailash Satyarthi's house here and stole his Nobel Prize certificate, a spokesman of his foundation said on Tuesday.
 
The burglary was carried out on Monday night and was discovered by Satyarthi's son. He said his parents were out of the country. He has filed a complaint at the Kalkaji police station.
 
The burglars broke into his home in the Aravalli apartment in Alaknanda here and also stole some jewellery, besides the certificate. 
 
Satyarthi is a renowned Indian child rights activist and the winner of Nobel Peace Prize in 2014. He is the founder of the Bachpan Bachao Andolan (BBA), an organization dedicated towards the eradication of child labour and rehabilitation of the rescued former child workers.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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