Is Reducing Income Tax Beneficial For The Indian Economy?

The Indian economy has been in the grips of income tax evasion for the longest time. It is important to understand the contribution of taxes to the upliftment of economies around the globe.

According to 2017’s data on tax collection: the same year when GST, a comprehensive taxation system, was implemented, shows 51.2% of the share of personal taxes in the overall tax revenue of the government. With years of improvement of GST policies through various councils and meetings upheld by the government, it is a naked eye’s scenario that the revenue has increased over time.

For someone who is not aware of the jargon or detailed overlook, I have explained each one below.

What is Income Tax?

An income tax is a type of tax levied on individuals or businesses that are based on their net income or profits. In most cases, income tax is calculated as the product of a tax rate and taxable income.

How GST helped in increasing the earning of India in terms of Income-tax?

Tax evaders who window dress their accounts at the end of the year to reduce their tax bill will find it more difficult to do so as a result of this information sharing. Such procedures were previously conceivable because the Income Tax Department lacked access to data lodged under state VAT legislation.

However, under the new system, GSTN will be the one repository for all of these transactions, and the IRS will have a clear picture of each business’s entire sales and purchases, as well as its overall profitability.

income tax

How reducing the Income Tax Rate is beneficial for the Indian Economy?

Before we dive into the theme of this article, I want to put out the fact that this piece is my personal opinion, therefore, welcomes any argument as to how the reduction in Income Tax is good for the economy both in the short and long run.

Initially, let’s see how the basic theoretical implication of increasing Income tax works.

As Taxes rises

Disposal Income Falls

Leading to the demand for the economy to fall

The empirical effect results in Production in the economy to fall

The production plunge results in the overall GDP of the economy to fall

The ultimate result is the growth rate of the economy drops

This shows how the increase in Income Tax can hinder GDP growth and the economy’s overall growth. Also, there will be an almost negligible impact as when the production is hindered, the overall profits of various industries falls, leading to a lesser collection of taxes.

Now, the inverse situation I will be explaining with 3-4 flow diagrams.

Firstly, we all agree that the reduction in Income Tax rate will induce people to either work more or have more leisure time. Let’s see how each of the ways is beneficial for the economy.

It is evident that in case the working hours of the individual increase, the income generation of the workers’ increases, causing an uprise in demand and, consequently, in the supply, thereby increasing the overall growth.

Now onto the second case, if there is a reduction in Income Tax, the working hours of a worker falls. The time left with them is leisure time, and they would be investing it in something they love to do, thereby rejuvenating the mind and increasing the efficiency of the labor. This will enhance productivity causing a spurt in GDP growth. If you find this hard to believe, I will be more than happy to explain this example.

The paper on working hours and productivity by Institute on Labor economics reported the following,

“They suggest that increasing the effective working time in the occupations such as part-time or medium-skilled jobs in the service sector would cause individual workers, in particular the relatively inexperienced ones, to produce smaller quantities of output per hour, due to fatigue. Such an increase in working time could, however, be beneficial for the quality provided.”

So, this clearly concludes that to enhance the productivity and efficiency of the labor, leisure hours or reduced number of working hours is a must.

In the second diagram, I will be reversing the implication of TAX increase but how exactly disposal income generation helps from the supply side. See, the increase in disposable income will increase the savings with which people will invest either in a mutual fund or real estate or anywhere, even if it is a bank. That money will automatically go to the suppliers and productivity rises causing a rise in GDP. There you go for the second charm.

Most of the time, the infamous argument thrown at me is that a decrease in government revenue because of the low-income tax rate will increase the budget deficits. The government will have to stick to borrowing either domestically or globally, reducing private investment and foreign investment, respectively. And because of this, future productivity is hindered, and employment levels are low.

However, I say this effect is neutralized. How?

Reduction in taxes will infuse more workforce in the economy the taxpayer population increases and the revenue generation rises. At least we can anticipate that. Moreover, I agree with the model experienced under USA’s President Regan reign popularly came to be known as Reganonomics or Trickle-down economics.

From Trickle Down to Bottom Up – PROPHETS OF PROFIT


He reduced the taxes specifically on the upper class, which increased their spending, leading to an empirical increase in supply curbing unemployment and trickling the effect down the line to the unfortunate section of society.

In a nutshell, raising the standard of the economy. But he faced an immediate drawback, which was inflation that soon got under control. In the short run, it is difficult for many economies to establish the model accurately, but eventually, everything becomes sorted out.

My apparent knowledge has led me to these flows only, but that doesn’t mean they are right; therefore, I will be open to any sort of arguments about this matter.


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