WOULD YOU SUPPORT THE ABOLITION OF PERSONAL INCOME TAX IN INDIA?
The elimination of income taxes is a hotly disputed and contentious topic in the United States. Personal income tax collection accounts for approximately one-fourth of the total revenue collected by the federal government.
While some economists believe that the loss of revenue for the government would be wrong, others believe that more money in the hands of the general public will lead to a growth of the economy. This article aims to discuss the ramifications of the repeal of the income tax.
The federal government has a variety of sources of income.
There are two sorts of taxes that the government primarily collects: direct and indirect. Direct taxes account for more than half of total revenue collection, with the remaining half from indirect taxes such as GST and excise fees.
The Advantages of Eliminating the Income Tax
Suppose that the income tax isn’t in the Budget for the country as a whole. Having a state with no state income tax would have what? First, more money for everyone. As soon as people have extra money, they spend it rather than save it.
When many people spend more money than they make, some of the rest of the population makes more money than they did before. Consider the case of a person who makes $50,000 a month.
People who earn money in 2021 have to pay 5,000 rupees in income tax. If the income tax is abolished, people who don’t pay it will be more likely to spend their money, which will help the economy.
Second, re-introducing illicit funds into the financial system is a risk. National Council for Applied Economic Research (NCAER) estimates that illegal wealth accumulated in India is between 384 billion and 490 billion dollars, depending on the source. This is approximately 14 percent of India’s gross domestic product (GDP).
Many people believe that a significant portion of this wealth was hidden away because of high tax rates and that dodging income tax alone made more financial sense at the time. The abolition of income tax may legalize this money, expanding the movement of money throughout the economy.
The Consequences of the Abolition of the Income Tax
If the personal income tax is repealed, the federal government will immediately lose around one-fourth of its revenue. According to India’s Comptroller and Auditor General, the country would have a budget deficit of 9.3 percent of its GDP in 2020-21. As a result, this figure would skyrocket to incredible heights.
Public infrastructure and social welfare programs are two of the essential government taxation. Direct taxes are the simplest and most efficient way to collect revenue as far as businesses go. A significant fraction of the population in developing countries, such as India, is still below poverty.
The state has a natural obligation to assist these individuals through various social programs. To make up for the sizeable financial shortage caused by the elimination of information technology, many social welfare initiatives may have to be put on wait for a while.
Because of the revenue shortage, the government may decide to raise GST rates on regularly purchased commodities, increasing the cost of these goods for the average citizen.
Because of the ongoing COVID-19 pandemic, the central government has recently excised duties on petroleum products to make up for the revenue shortfall generated by the taxation of petroleum products. Indicators of possible government responses to a decline in government revenue include the following:
Is it conceivable to remove the Income Tax in a practical sense?
No government would want to see a quarter of its revenue disappear overnight, and neither would you. In India, direct taxpayers are so insignificant that they do not constitute a significant vote bank for any political party.
Instead, it would be detrimental to them if assistance programs were to be temporarily suspended because the beneficiaries of these programs are large enough in number to have an impact on an election.
The government will not be able to repeal the income tax until it discovers alternate sources of revenue. There is a caution here: it should not directly impact the average person. One notion made by well-known economists is the implementation of an inheritance tax.
Described, this is a tax charged against individuals who inherit their ancestors’ properties or savings. Many western countries, such as the United Kingdom, impose inheritance taxes on their inhabitants, ranging from 10 percent to 40 percent.
In the same way that any other policy has advantages and drawbacks, a zero-income-tax regime has both. The fiscal deficit would increase dramatically in the short term, and several social welfare initiatives and infrastructure projects could be put on hold due to the revenue shortfall.
In contrast, higher currency circulation may result in the economy expanding at a faster rate than previously anticipated. Perhaps eliminating income tax is not such a far-fetched notion after all!
Why does Subramanian Swamy want to get rid of the income tax? Find out more here.
The Union Budget 2022 will be released in just a few months. The general people are looking forward to the upcoming changes to their income tax bands. Subramanian Swamy has a proposition for the administration in the middle of this.
The economist announced his aim to abolish the income tax-totally in an interview with Business Today. This isn’t the first time he’s attempted something similar, and he’s been a vocal supporter of India’s income tax abolition.
In response to the question, “What would you do as India’s Finance Minister?” he responded that his first item of business would be to abolish income tax for everyone beginning April 1.
He also suggested that banks raise fixed deposit interest rates from 6% to 9% to attract more clients, and this would assist the Indian economy in reclaiming lost ground.
What is Subramanian Swamy’s motivation for advocating for the abolition of income tax?
According to Swamy, the following are the most compelling arguments in favor of eliminating the income tax in India:
Savings Rates Have Dropped
Swamy stated that households’ savings across the country had decreased due to excessive taxation. Because most investments are made using savings, the amount of money available for investment has fallen. He stated that households had reduced their savings percentage to 36%, from 31% previously, which has harmed the economy.
Interest Rates that are too high
Swamy also stated that the interest rates in India are incredibly high. These should be reduced since they would make easy money in the country. People will spend more money, which will help to revive the economy. People are encouraged to spend less due to high-income taxes and interest rates, ultimately hurting the economy.
Alternative Sources of Revenue for the Government
According to Swamy, the total income tax collected in India is approximately Rs 8-9 lakh crores. If the income tax is repealed, the government will generate revenue from various sources, such as the auctioning of telecom licenses and coal auctions. He asserted that the government does not face a scarcity of resources to raise revenue.
People unwilling to pay higher taxes as a result of declining economic growth
Before the virus wreaked devastation on the entire planet, the economy was already in peril. According to Swamy, individuals are willing to pay higher taxes if the economy is performing well, and this is not the situation at this time.
MSMEs in Financial Difficulty, Increased Unemployment
People have a general tendency to avoid paying their taxes. Tax planning, often known as tax avoidance, is considered a lawful method of lowering one’s tax bill. Evasion, on the other hand, is a criminal offense. In the country, there is a parallel black money economy that exists. By allowing black money to circulate, we are essentially reducing the quantity of cash in the system and increasing the currency’s price.
Black money creation and accumulation cannot be accurately or generally estimated because there is no commonly accepted methodology. There is no consistency or agreement among the estimations that have been made so far on the optimum methods or strategies to apply for this purpose.
If personal income tax is repealed, there will be no opportunity for black money to be created through tax evasion of legitimate earnings. The entire amount of money will be available for use in the economy’s productive endeavors.
Consumption, national savings, investment, and growth will all increase due to this. However, money obtained illegally (via corruption or otherwise) may continue to be a component of the parallel economy even after this exercise is completed.
During the 1973-74 fiscal year, personal income tax reached its highest rate of 97.5 percent. When the Direct Taxes Enquiry Committee examined the issue in 1971, they concluded that the high tax rates were to blame for the widespread evasion and proposed a lower marginal tax rate.
As a result, the tax rate has been gradually reduced with each consecutive Budget. Being or becoming wealthy is no longer regarded as a sin, and no one wants to punish those who have achieved wealth.
Banks create credit as a means of financing their operations.
Assuming that banks usually keep 3 percent of their deposits under the Cash Reserve Ratio and lend 97 percent of their deposits (including the SLR requirement), every 100 dollars in new deposits will boost the money supply by approximately 3,200 dollars.
This is because 97 percent will be returned to the banking system as deposits, which will then be lent again while retaining 3 percent, and the cycle will continue indefinitely. This is referred to as ‘credit creation by financial institutions.
If any black money is brought into the bank as a legitimate deposit, this will significantly impact the money supply and, consequently, productivity. This will have a significant influence on financial institutions’ lending ability.
If the personal income tax is repealed, about 6.32 billion people will be relieved of the stress of filing numerous tax forms every year. Individuals must keep and submit various documents and return to comply with income tax requirements. Returns are meticulously scrutinized by the Income Tax Department, which then issues requests, refunds, and other forms of lengthy letters in response to them. The litigations are typically protracted for years at a time, putting a strain on both the person and the government involved.
Personal income tax will be scrapped, which will relieve the different organizations in charge of TDS of collecting, remitting, and filing numerous reports if it is discarded.
Alternatively, as the media suggests, the income tax rate might be set at zero for one or two years and the results observed before the charge is eliminated. The GST rate can be rationalized in the following years to compensate for the revenue shortfall.
A handful of countries in West Asia, such as the United Arab Emirates and Qatar, do not collect income tax. This is an option that India should consider, as it may prove to be a successful method of attracting international investment.
edited and proofread by nikita sharma
