Imagine, our Prime Minister appears on the TV tonight to make an announcement.
“Friends, to protect you,
to protect your family,
tonight, midnight onwards,
the Income Tax in the country will be abolished.”
“No citizen would have to pay any income tax any longer.”
“India would now become a 0% Income Tax country.” Good news for all citizens. Don’t you find this quite unrealistic? But it is not unrealistic. Because BJP MP Subramanian Swami supports this. He says that to revive the economic growth of the country, Income Tax should be abolished. There are several countries in the world where no personal income tax exists.
But for a large country like India, is it possible to do this? If yes, what will be its pros and cons?
Come let’s try to find out in today’s article.
“In the upcoming budget, the Government can make drastic decisions.”
“Personal income tax and Simplification of taxation.”
“Arun Jaitley tells the government to hold the IT forms.”
“I propose to bring a new simplified personal income tax regime.”
Direct Taxes vs Indirect Taxes
To understand this topic in-depth, there are some basics of taxation that you should know first. So let’s begin from the beginning. Broadly speaking, there are two types of taxes collected by the Government. Direct taxes and Indirect taxes. Direct taxes are the taxes that you, as an individual or a company, pay to the Government directly. Such as the Corporate tax, Capital Gains tax, Property tax and Income tax, all fall under the category of direct taxes.
Apart from these, there are Indirect taxes. These aren’t paid directly by the individual on whom the burden falls. A major example of this is the GST. Suppose the Government increases the GST on milk, then the milk manufacturers and the milk suppliers, will increase the cost of milk accordingly. And when you’ll go to the market to purchase milk, you will have to pay extra.
The expense due to the increase in the GST, is being paid out of your pocket. But you’d pay that money to the suppliers and milk manufacturers. And then they will pay this extra GST to the government.
Essentially, the cost of the GST, will be borne by you, but will be paid to the government by the milk suppliers and milk manufacturers. Thus, this is an Indirect tax. Because you are paying this tax indirectly to the government. The Excise duty on petrol, diesel is also a good example of Indirect tax. Often, you will see people on social media and WhatsApp claiming that only 2% – 3% of the citizens actually pay taxes.
This is an outright lie. Because if you consider taxes like the GST, not only every citizen of the country that purchases any good from any shop, on which GST is levied, is a taxpayer. But also a foreigner that visits India who purchases something from a shop, is a taxpayer. Every citizen, every foreigner that comes to India, lives in India, everyone is a taxpayer. But when they claim that only 2%-3% of the citizens pay taxes, then they’re talking about Income Tax. There are very few citizens in the country that pay Income tax.
Advantages of Zero Income Tax
According to the data from February 2020, of the 1.3 billion population of the country, only 14.6 million Indians pay taxes. This is about 1% of the population of the country. The reason for this isn’t that many people aren’t paying the taxes, or are keeping black money, the reason is simply that a significant portion of citizens are so poor that they do not reach the exemption limit. Their income is not enough.
For this reason, the people that do pay the income tax, the salaried Income Taxpayers, feel that they are being exploited by the government. There are anyway so few people on whom so much income tax is levied and who do not get anything in return. For a businessman or a company, it is relatively easy to hide their income and evade paying tax, then compared to a salaried taxpayer.
Disadvantages of Zero Income Tax
Because when a common man gets a salary, the income tax is already deducted from the salary before being paid. On top of it, the agriculture income isn’t taxed in India. You’d say that the farmers hardly earn anything. What will be taxed? But an RTI was filed in 2011, friends that I’ll like to tell you about, that showed that there are about 700,000 individuals in the country who had earned millions from agriculture but paid zero taxes. So there are several rich farmers, or you can say some rich businessmen do farming, that earn millions from agriculture, but don’t pay any income tax because in India, agricultural income is exempt from Income tax. This is said to be another reason why the income taxpayers feel exploited in India.
But this was from the perspective of an individual. An even more important question is how will the country benefit if Income tax is abolished? The examples that I’ll state here are purely theoretical. Because no one knows for sure how the country would benefit. There are some presumptions, and arguments that are used in its favor by experts and economists. The first argument is that the money that the income taxpayers will save by not having to pay income tax, the income taxpayers will be able to spend it on other things, for their personal benefit or their pleasure. Leading to more money being circulated in the economy. Increasing the economic growth of the country. The second argument is that the people who were liable to pay income tax but were hiding their money from the tax authorities, meaning the people with black money, by abolishing Income tax, their black money will be converted into white money.
They wouldn’t need to hide the money. And they’d be able to openly use that money. Can get it deposited in banks. Or if they openly use it to buy things, it will again lead to an increase in money circulation in the economy. Economic growth will be boosted. And the money that they will openly deposit in the banks, will lead to increased deposits with the banks, and the banks will be able to lend money to the public more easily, the interest rates will fall, causing people to borrow more spend more, and boosting economic growth further. It is a very interesting argument, with a small problem. We do not know the exact figure of black money hidden by the citizens. The third argument is very simple, the money spent by the government to collect income tax, will then be saved.
The website maintained by the government, the expense of maintaining documentation, the money spent on the income tax officers. And from an individual’s perspective, the person that spends his time to understand the various technical terms, for filing income tax returns, paying the accountants, all the hassle, time and money invested in these, all this time and money will be saved with the abolishment of Income Tax. If you want to save your money, time and hard work while filing your taxes, fortunately, there does exist an option today, that is TaxBuddy.com
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Coming back to the topic.
Till now I’ve told you the potential benefits of abolishing Income Tax. Now let’s see the potential disadvantages of doing this. The biggest and clear cut disadvantage will be the revenue loss of the government. Look at this graph to know the exact revenue loss. This graph shows the % by which the various taxes add to the government’s revenue.
After GST at 28.3%, it is the Income-tax from where the government’s 26.4% revenue is generated. About 1/4th of the tax revenue of the government will disappear if income tax is abolished. So where will this huge amount be recovered from? It isn’t so that the government will let go of 26% of its tax revenue without being bothered by the loss. The government will want that the money they’d be losing out on would be recovered in some other form and source.
How can this money be recovered? The people favoring the abolishment of income tax, they argue that to some extent, it wouldn’t even be needed to be recovered, because the economic growth will prosper so well by abolishing income tax, that the remaining sources will draw in more money. The GST revenue of the government will increase. To compensate for this loss. Friends, here it will be very helpful to look at the countries where no income tax exists. There are about 23 countries in the world without an income tax. Where do the governments of those countries get their revenues from? How do they earn sufficient revenue? Let’s look at them one by one.
Case Study: UAE
Perhaps the first country that you’d think of is the United Arab Emirates. There is neither a personal income tax nor a corporate tax in Dubai. In the UAE, oil companies are taxed and the corporate tax on them can even range up to 55%. Apart from this, the foreign banks operating in the UAE, are taxed up to 20% on their UAE based income. But other than these corporate taxes, in the UAE the entertainment tax is quite high. That is levied on amusement parks and theatres. Other than these, the import duties are also high. When one imports alcohol from another country, then it can be taxed up to 50%. Additionally, when the alcohol is sold, at the point of sale, it is taxed 30%. But overall, for the UAE, the answer to this question is Oil. And India does not have any oil to sell. So for India, this revenue source does not exist.
Although interestingly, for the UAE to remain dependent on oil, is proving to be difficult. Because when the oil prices fall, the revenue of the Dubai government falls as well. That’s why countries like the UAE are trying to diversify their revenue sources. That’s why in 2018, for the first time, 5% VAT was introduced in the UAE. So that the government may get a new revenue source. Of the 23 countries, 6 are like the UAE, that rely on oil for the functioning of their government. But what about the other countries?
Case Study: Monaco
There’s a European country called Monaco. A small country with no personal income tax. Monaco is a renowned tax haven where the rich want to stay. But it is a special case. This country is so small, and so many rich people live in this tiny area, that the property price here is extremely expensive. And the government collects 1% tax on the property being rented. The VAT here is quite high at 19.6%. And because so many rich people live in this overcrowded area, things have become very expensive here. The cost of living here is one of the highest in the world. If such a situation is created in India, then it will be terrible for the common people. Because no common man will be able to afford a cost of living this high. That’s why let’s move on to the next country.
Case Study: Bermuda
Bermuda has no oil, no personal income tax, no corporate tax. So how does the government earn here? The answer to this is the very high import duties in Bermuda. If you live in Bermuda, and you import something to Bermuda, since it is an island, you will have to import things, you’ll then have to pay very high import duties on them. 20% of the government’s revenue comes from import duties. There’s a vehicle tax of up to 150%. And there is also a land tax in Bermuda, which is as high as 47%. Apart from these, another revenue source of the government of Bermuda is the Payroll Tax, that’s similar to income tax. Because this is levied on the salaries of the employees. When the employees are paid by their employers, then this tax is imposed. Though it sounds like income tax, it is a bit different. Because income tax is levied on every type of income. But the Payroll Tax is imposed only when salary is being paid. I think these examples are enough. You would’ve understood the basic concept.
New Sources of Income?
When the government lacks funds, it looks for other sources to earn revenue. So the Indian government will also need to find some source if the income tax in India is brought down to zero. And the other taxes don’t generate as much revenue as they expect as a result of abolishing income tax. Here I’d like to ask you. What do you think? If the government lacks funds, by abolishing income tax, from which sources, or taxes, should the government try to earn more? Comment below. One option can be to increase the GST. The disadvantage of this will be that GST is not a progressive tax. GST is the same for everyone.
But in income tax, if your salary is high, your income tax liability is more. If it is done, its adverse effects will have to be borne by the poor. Look at it proportionally. When you are buying the same thing from a store, suppose it attracts 18% GST, and a poor person is buying the same thing and paying 18% GST on it, then proportionally, for that poor person, it is more difficult to pay the 18% GST. It’s a bigger part of his income. The second option can be to introduce a new tax. Like an Expenditure Tax. Or an Inheritance Tax. Inheritance tax is a very interesting concept, friends, that doesn’t exist in India today, but it used to exist once. All the wealth you’ve accumulated in your life, when you give that wealth to your children, when they inherit your money, then it is taxed.
Many people argue that this tax is more justified as compared to income tax. Because have your children worked to earn that money? They haven’t. So it’s justified to tax it. In a way, this argument goes against nepotism as well. If you haven’t worked hard yourself, and your success and riches is because of your family, then you don’t deserve it. But on the other hand, if you are earning a salary, and paying income tax on it, it is more unfair than compared to inheritance tax. This is a very interesting topic for a debate.
But in conclusion, I’d like to say that overall, the government will have to weigh its options. If the potential benefits of abolishing income tax are more. Or is it more favorable to continue with income tax? This can be judged only after the careful calculation of economists. But overall, the government should do what is in the favor of the common man, In the favor of the citizens.