Enough has been said about how successive Indian governments have failed to take care of honest taxpayers. Far from taking care, successive governments have been taxing them further and further.
And then, the classic case of double whammy wherein government tax gains on investments made by savings that were already taxed ! Capital gain taxes on equities is a classic example of “double taxation / double whammy”
How to address it?
There are many ways of fixing it but knowing our finance minister (FM), anything that FM will try to fix this will only worsen things 😊
Government themselves are aware of few bold steps but are they willing take such steps? One such measure is to eliminate personal income tax (including all sorts of capital gains) completely.
Personal Income Tax collection in financial year 2019-20 was Rs 4.3 Lakh crore against a target of Rs 5.6 Lakh crore (link to this data provided at end of the post). Government needs about Rs 5.6 Lakh crore to compensate abolishing of income tax. How can that be achieved?
What can government do to compensate for eliminating personal income tax?
Population and GST:
India’s population is about 140 crores (1,40,00,00,000). Assuming everyone (including infants or senior citizen) is buying something or other,
- We need an additional GST of Rs 3,000 (average) per person to match actual income tax of Rs 4.3 Lakh crore. For Rs 3,000 additional GST per person, at lowest GST slab of 5%, everyone (on average) needs to spend Rs 61,500 additionally per year (Rs 61,500 *5% GST = Rs 3,075)
- To match expected income tax of Rs 5.6 lakh crore, we need Rs 4,000 (average) additional GST per person. For Rs 4,000 additional GST per person, at lowest GST slab of 5%, everyone (on average) needs to spend Rs 80,000 (Rs 80,000 *5% GST = Rs 4,000) additionally per year
Obviously, this is a theoretical model. “Poor” will spend less and “rich” will spend more. Government need to encourage folks to spend more (across various GST slab items) and one way of doing that is by allowing individuals to have more dispensable income. By eliminating income tax, government will help in increasing individual’s purchasing power.
Plug the leakage:
- All said and done, tax payers money is being poured into loss making PSUs. Take a decisive call on PSU making loss for many consecutive years. Either hand over to experts who can turn around them, albeit with some tough decisions or shut them down
- Continue with disinvestment process
- Eliminate corruption at all level in government departments, public will comply automatically
- Be pragmatic with policies, to ensure 5G auctions are meaningful etc.,
Some more pragmatic ones like:
- Introduce higher slab GST for “premium” products
- Currently if tax slabs can be based on individual’s annual income, then GST also can be based on the purchasing power of an individual
- Poor folks will not be affected by higher GST on premium products because poor folks anyhow cannot afford and do not buy premium products. If they can, they are not poor
- Replace all sorts of capital gains with one-time tax
- For equities (share market) increase STT by (say) 1% or 2% but completely eliminate all kinds of short term and long term capital gains
- Similarly, for real estate introduce equity market’s type STT at (say) 2%
- ALL e-Commerce purchases (irrespective of amount) involving Cash-On-Delivery to attract an additional tax of (say) 5%
- For someone to purchase anything online, they need to have laptop or desktop or tab or smart phone etc., which means they have mechanism to pay digitally (through UPI or net banking or cards or wallets etc.,). If such individuals do not want to pay digitally, tax them
- Any cash transaction more than (say) 5,000 Rupees in stores, shops, restaurants. etc., to attract an additional tax of (say) 5%
- Any donations of more than 1,000 Rupees to political parties to attract a “cash transaction” tax of minimum 10%
- Any withdrawal or deposit of more than (say) Rs 10,000 in a day or (say) Rs 50,000 in a month should attract 1% cash transaction tax
- You got the point, tighten noose around cash transaction. Tighten GST compliance at all level and minimize cash transactions, that should check corruptions to great level
- Stop printing 2,000 Rs currency note immediately. Announce that 2,000 Rs note will be out of circulation from (say) 1st July 2021. Political compulsions (like Bihar elections) can delay the announcement to late November 2020 but take this bold step. People should have about 6 months to deposit all their 2,000 Rs notes in banks. Do not introduce Rs 1,000 currency note, let Rs 500 be the largest denomination currency note
What will happen all those tax saving investment schemes. What if public stop saving or taking insurance !
While it was good earlier to link various investment options like PPF and insurance products like life insurance, medical insurance etc., to tax benefits, there is lot more awareness now than earlier. General public knows that they need insurance and need to make long term investments. Moreover, government already has introduced insurance for all saving bank account holder. If needed, similar bank linked products can be introduced for long term savings also.
There are ways and means of ensuring and (if required) enforcing basic insurance and long term investment plans, hence this should not be the reason to continue with income tax !
Opposition will cry, people will protest:
What’s new? Irrespective of which political party is in power and who is in opposition, most of the times opposition political parties job is to oppose anything and everything. There would be hue and cry all around, politicians will instigate public, mobilize mass and probably create riots. Deal with it. If government can implement these properly, they do not have much to worry about, as common man will see benefits immediately
Will eliminating personal income tax eliminate black money?
First, this post is not on how to eliminate black money. Second, eliminating black money is impossible. Black money will continue to exist because
- Few/many individuals and corporates and politicians etc., etc., are corrupt. Nothing can change them. No matter what you do, they will continue to find new ways of corruptions and creating black money
- Many of government policies will continue to push “honest” folks to indulge in corruption and black money
Though Abolishing income tax and tightening noose around cash transactions will lead to better compliance, government should not stop with that. Government need to be innovative to continue to find ways to tighten it’s noose around corruption. For that, they need a good finance minister 😊
Summary:
Government has been saying that more money in citizen’s hand means they will spend more, there by improving economy and GST. Without going into merits/demerits and assuming this to be true, abolishing of personal income tax will leave tax payers with more money in hand to spend. This will give much required boost to economy. Such a boost to economy will improve money circulation in market, resulting in additional GST collections and feel good factor
Less than 2 % of India’s population pays income tax. Government is spending lot of money in ensuring compliance from these meagre 2% population. Abolishing income tax will lead to
- increase in disposable income in hands of individuals, which would in turn lead to increase in purchasing power of all such individuals. This is expected to increase domestic consumption and provide much needed up-lift to our economy
- Government machinery that’s freed up from income tax and related departments can focus time and energy on fighting corruptions and other better / more productive activities
Finally, income tax or not, nothing will be a sustainable model if our population continue to grow at current rate. Let's keep population issue aside, for a different blog :)
This post is not at all about ITR filing ! No where does it says not to file ITR.
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