WHAT IF Income tax is abolished in India?

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“Bhaiyo or Behno aaj raat 12 bje se Income Tax nahi lagega”

Sounds Strange Right? 😅

Abolishing Income tax has been a highly debated and controversial proposal in India and has emerged from time to time, from manifestos of Political Parties to Statements of members of Parliament.

Personal income tax and Corporate tax accounts to approx. 50% of total tax revenue of Govt. of India.

Some economists argue that the loss of such an important source of revenue would be detrimental and can hinder the growth of the economy as a whole, while other suggest that it would help in the expansion of the economy as a result of increased purchasing power in hands of people.

Before proceeding further let us know why tax is charged: -

(For Rookies, you may skip to the next good part😁)

Various taxes are being levied by countries around the world to generate income to – boost the economy, fund projects, and provide a better standard of living for their citizens.

Alike, taxes are levied in India by Central and State govts that have been given authority by the constitution.

The 2 main taxes levied in India are: -

  1. Income Tax
  • Personal Income Tax
  • Corporate Tax

2. Goods and Service tax

There are other taxes levied as well but these are the main source of revenue for the govt, these 2 constitute 70-80% of the total revenue of Govt.

What is income tax?

Every person is chargeable to tax on the total income earned in an annual year at rates as applicable to him.

Person includes Natural persons(individual) and Artificial entities like HUF, Firm, LLP, Company, Association of persons, Local authorities etc.

Income tax accounted for 45.8% of the Gross Tax Revenue of Govt of India. (Year 2020-21)

  • Personal Income Tax – 23.2%
  • Corporate Tax – 22.6%

Source here

We’ll now discuss the idea of abolishing Personal Income Tax!

Positives: -

  1. More Consumer Purchasing Power
    If income tax is abolished then more money in the hands of people will naturally lead to an increase in demand and savings in the economy which will lead to more money circulation in the economy. Though, this may not have a huge impact because the proportion of taxpayers in India is significantly low (6.5% of the total population)
  2. Entrance of Black Money
    It is expected that as a result of Income tax abolition, black money would find a way back into the economy. A significant portion of Black money is generated due to the evasion of taxes. Abolition of taxes could make this money legal which will again lead to an increase in the circulation of money in the economy.
  3. Economic upliftment
    With increase in money circulation in the economy and demand, it would help the economy to emerge as a golden opportunity for investments which would lead to growth and development as a whole.
  4. Relief in Compliance burden
    Abolishing income tax would provide relief to a common man, earning above limits, from the compliance burden like filing the Income tax return, depositing advance tax 4 times a year, tax challan, TDS deductions etc

Negatives: -

  1. Loss of revenue
    A loss of ¼th of revenue could lead to huge impacts on the economy. It may lead to: -
    - Increase in fiscal deficit
    - Pause on infrastructural projects
    - Significant impact on welfare programmes run by the government
  2. Hindrance in economic growth
    Government and RBI by their fiscal and monetary policies respectively regulate economic activities over time. The benefits we discussed above may backfire which could lead to a loss of control of the government over the economy and it may lead to problems like inflation in the economy.
  3. Rise in Regressive Taxes
    Abolishing income tax, which is a progressive tax may lead to an increase in rates of regressive taxes like GST to cover the loss of revenue and it would have adverse effects on the economy and society like: -
    - Inequality
    - Higher prices (Inflation)
    - Reduces Choice
    Know more about Regressive taxes and Progressive taxes
  4. Loss of track of money
    Government tracks money with the implication of the income tax act, like by deducting TDS on payments or collecting PAN in various transactions. Its abolishment could lead to loss of track of money which may increase illegal activities in the country.
  5. Loss of Jobs
    There are more than 46000 employees in the income tax department (Source) and thousands of tax professionals in the country, who may be laid off.

Conclusion: -

As we conclude this discussion about abolishing income tax, certain points are concluded: -

  1. It won’t be as easy as said to abolish income tax however it can be done slowly step-by-step, like firstly reducing tax rates or increasing minimum exemption limits and simultaneously finding ways to compensate for the loss of revenue.
  2. Even if the income tax act is abolished, there shall be a law to keep track of money.
  3. Other sources of revenue can be: -
    - Increase in rates of existing taxes
    - Inheritance tax – know more here
  4. There is another argument that government should develop a credit system inclusive of both indirect and direct taxes.

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