The most thrilling idea before every Budget: No income tax
January, 18th 2018
Ever since the NDA government came in power, there has been a buzz about abolition of personal income tax. Right from BJP MP Subramanyan Swamy to Anil Bokil of Arthkranti, many have proposed this radical move. Some, like economist Surjit Bhalla, have proposed a flat tax.
Since Prime Minister Narendra Modi's demonetised high-currency notes—an idea propagated by Arthkranti—many believe he could implement another Arthkranti idea too, that is abolition of income tax.
There is little chance that Finance Minister Arun Jaitley would go for such a radical move in the Budget. The government has already constituted a task force for redrafting the 50-year old income tax law in sync with the economic needs of the country. It will give its report after five months.
There are several arguments in favour of abolition of income tax. India has not been able to expand the tax base. The personal income tax collection as a proportion of the GDP has been around 2 per cent in the last few years, which is abysmally low for a large country like India. Mostly it's the middle-class salary earners who pay income tax honestly.
While the poor don't pay taxes, the rich find innovative ways to avoid paying tax. "India has been largely a tax non-compliant society," Jaitley had said in his Budget speech last year. If the government takes the bold step to end personal income tax system, it would affect only 2 per cent of population and would be less risky and more politically remunerative in comparison to changes like note ban and GST which affected every citizen.
Another argument is that the abolition of income tax will not merely lead to revenue loss. It will also put cash in the hands of people which will increase demand and boost the economy. It can also lead to more savings.
A benefit of abolition of income tax is that the government can use its gigantic tax bureaucracy to focus more on other taxes such as GST and tracing black money. Another benefit could be creation of more jobs as it can bring down wages and encourage companies to hire more employees.
Banking sector can also gain from this move. With no black money, people will keep most of their money in banks instead of finding ways to hide it. This will boost bank deposits and lending.
As suggested by Anil Bokil's Arthakranti, the government can then even introduce a nominal banking transaction tax.
Abolition of income tax is a low-hanging fruit for the government. It can also be a big populist move before several state elections this year and the Lok Sabha elections next year.