Why India Should Abolish Personal Income Taxes?

Personal income taxes are omnipresent all over the world. From the developed nations to the developing ones, all tax the incomes of their citizens at different rates. There are only ten countries across the entire world where there are no income taxes. Out of these ten countries, six are from the Gulf peninsula. The governments of these nations derive a vast portion of their wealth from oil revenues. The other four are countries like Monaco and Bermuda. They are known tax havens which generate enough revenue from offshore money that they can run their small economies.

If India were to abolish personal income taxes, the move would be unprecedented in many ways. It would become the first major economy in the world to abolish income taxes. In this article, we will explain why it is plausible that India can abolish personal income taxes without disrupting the economy.

Tax on Middle Class

Firstly, it needs to be understood that the rate of tax compliance in India is very low. The very rich do not pay any taxes because they find loopholes and ways to hide their wealth. The majority are very poor and therefore do not need to pay taxes. It is only the middle-class salaried people in India who are paying taxes. This demographic is also the one which is driving India’s growth. The average taxpayer is educated, young lives in an urban area and is used for conspicuous consumption. BY taking money away from these people, the Indian government only hurts the GDP.

Low Tax Base

It also needs to be understood that less than 3% of the total population of India pays any income tax. Amongst the ones that do file tax returns, about 50% declare zero taxes. A very tiny percentage of people who are in the very high-income range actually pay these taxes. In a country of 1.25 billion people, only 400 thousand people pay a substantial amount of income tax.

Also, other countries are heavily dependent on personal income tax to meet their budgets. However, this is not the same in India. India derives less than 15% of their budget from personal income taxes. If the government can cut 15% of their spending, they can simply abolish the income tax and there will be no effect on the budget.

This less reliance on personal income tax is what makes abolishing it a very real possibility.

Lower Administrative Costs

As mentioned above, the amount of money received from this whole charade is very less. The government does not make a lion’s share of its revenue from income taxes. However, they do pay a lion’s share of the money received in the form of expenditures.

The Indian government has a large bureaucracy which enforces these tax laws. Everyone is supposed to file a tax return. The paperwork takes up a lot of time and resources. Also, since the rate of compliance is so less, the government has employed many people to zero down on non-compliance and conduct raids. Corruption and bribery have ensured that the Indian state has not been able to substantially increase its tax income even after employing these tax hit men.

Hence, if the personal tax is abolished, the government would not need to employ a large number of people doing paperwork. Hence, even though the income would go down 15%, there will be a huge drop in the expenditure as well! Once again, this is what makes abolishing income tax a plausible idea in an economy which has the scale of India.

Higher Economic Turnover

Cutting down on income taxes will end up putting a lot of money in the hands of the people. These people will then spend this money on everything from electronics to real estate. As a result, the GDP of the nation will increase by leaps and bounds. India needs to increase the indirect taxes marginally. This would help the government raise more revenue when the economic turnover increases and the economy grows in size. The shortfall from personal income taxes will be compensated by an increase in the tax base and a marginal increase in the tax rate of indirect taxes.

Cut Subsidies

At the present moment, the Indian government offers a lot of subsidies to the lower middle-class population. These subsidies include subsidy on cooking gas, electricity etc. Farmers also get frequent loan waivers and fertilizer subsidies. The government, therefore, spends more than it earns in personal income tax revenue on subsidies. The solution to this problem is that the subsidies should also be cut down. Cutting down on subsidies without cutting down on income tax would be politically unpopular. If the subsidies are also cut down along with income tax, the government may end up saving some revenue instead of losing revenue.

Asset Price Deflation

India is also suffering from asset price inflation. The prices of housing and other assets like gold have gone through the roof. This is because people try to evade income tax by investing the money in other assets. Since gold and real estate are these assets, their prices are heavily inflated, and the common man is not able to afford them.

Abolishing the income tax will, therefore, have several benefits for the government as well as the common man. It would be financially imprudent to take such a step.