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What is income tax?

It is a tax levied on both earned income (wages, salaries, commission) and unearned
income (dividends, interest, rents).

Why should income tax be abolished?

No income tax means more spending, more demand, more production and more jobs.
In short, in a faster growing economy income tax leads to tax evasion as people
don't declare their true income. If there is no income tax there will be no need to
evade tax!

No income tax will mean a greater incentive to work, after all, a large chunk of our
salary or business profits goes towards payment of taxes plus the utilization of our
taxes is largely shrouded in mystery.

Certain habits can be curbed through elective use of the indirect tax weapon, such as
very high taxes on fuel guzzling imported cars. Don't we all crave a greener world?

The cost of collecting income tax is higher (more than 0.65% of the revenue
collected), than the cost of indirect tax collection.

Income tax is progressive, Indirect tax is regressive

The rich pay more and in turn this money is used to benefit the society, including the
weaker sections of society.

If income tax is abolished (both individuals and corporates), the indirect tax
machinery will need to work overtime and the tax rates would need to be higher.

The biggest criticism in relation to an indirect tax regime is that it is
regressive in nature. You buy, you pay!(i.e. it is same for both rich and poor). On
the other hand, sin products like tobacco and imported wines has heavy indirect tax
levies. On abolition of income tax, hiking rates on essentials to meet the collections
would badly hit the Aam aadmi.

Yet the above measures are not easy to introduce or to implement. Further, even if
implemented, it would take time for the new mechanism to fill in the entire gap which
total abolition of direct taxes would result in. For example, what extent can tax rates
be hiked for luxury items and niche luxury items?

However, steep rates on niche luxury items would further shrink the population which
consumes these products, resulting in the tax collection estimate from this mechanism
not being met. To bridge the ever widening tax collection gap, there would be a
trickle-down, with the tax rates on even essentials rising.

In India, if there is an immediate and complete abolition of income tax, we are likely
to see rising prices and a huge dent in consumer and investor confidence. It is true that
the ills of black money would be abolished if income tax were abolished, but one
cannot throw the baby out with the bathwater.

Perhaps, the regressive nature of indirect taxes can be diluted by

Identifying and imposing a higher tax on luxury items and an even higher tax on niche
luxury items.

Introducing a supplementary tax on some goods, such as an imported car or an
indigenously manufactured luxury car, taxing a proportion of spends on big fat
weddings etc.,

Bringing in real estate within the ambit of indirect tax in a more meaningful manner,
such as progressive mechanism of stamp duties (say purchase of large mansions,
second homes etc., being subject to a higher percentage of duties).

Introducing estate duties - Countries such as Belgium, Germany and Switzerland have
steep estate duties. In Belgium's capital Brussels the rate can be as high as 80% if the
inheritance is not from direct/indirect ascendants or descendants.

Can India afford to do away with income tax? Is there any alternative?

It might sound surprising, but there are countries where you do not need to pay
income tax (UAE, Qatar, Oman, Kuwait, Cayman Islands, Bahrain, Bermuda, The
Bahamas, Saudi Arabia, Brunei Darussalam).

Some of these countries are well known tax havens, while most others have managed
to use natural resources to fund government expenses. Can India afford to do away
with income taxes?

Clearly, there are legal and constitutional issues involved, as sales and excise taxes on
some products are in the domain of state governments. And administration of the new
regime would require a huge overall change in the existing system, most importantly
the banking system.

Alternate for income tax Expenditure Tax.

The direct taxation from personal expenditures for consumption is one of the oldest
yet least tried ideas in the history of taxation.

It has both merits and demerits and deserves a serious thinking, what with the given
state of the economy, stubborn inflation and savings rates having fallen significantly
in recent years in India.

Expenditure tax

The consumption tax, sometimes referred to as 'spending tax' or 'expenditure tax, is
quite like the income tax, with one key difference being that the tax base is
expenditure, not income.

The best way to arrive at a person's spending power vis--vis his needs is to look at
his day-to-day living expenses. Income tax is an inferior measure of taxable capacity
because it does not encompass spending power in other forms and takes no account of
differences among individuals as to the need to save.

One major argument put forward against the expenditure tax is that by taking away
savings from the tax base, one tends to favour the rich, as they are in a better position
to save larger portions of their incomes. This would render the proposition
'inequitable'. It may also lead to greater concentration of wealth in the hands of few.
So the rates of an expenditure tax can be made steeply progressive in order to tax the
rich heavily.

Another criticism of the consumption base is that it would favour the miser (hoarder)
over the spendthrift (spender).

It is argued that only by spending, and not by earning and saving, the individual
impose a burden on the rest of the community. In other words, personal consumption
drains the resources available to the community for investment and public uses while
work and saving add to these resources.

One generally accepted merit of this tax is that it would be highly effective as an anti-
inflationary tool. On the other hand, the tax lacks the automatic stabilizing effect of
the income tax in periods of recession.

Current facts on income tax in India

In contemporary India, income tax is largely a tax on the middle class salary earner.
The poor hardly pays any income tax. The rich have dividends and capital gains as
large part of their source of income rather than salaries.

99 per cent of India's tax paying people are being coerced into filing their tax-returns,
while they pay miniscule amounts as tax on some pretext or other. The guys who pay
up are mostly the salaried class, because they can't evade it, as it gets deducted as

Case for replacing Income tax by a 'consumption tax' like BTT (Banking
Transaction Tax)

Why should only a particular class be forced to pay taxes? It would render great
political mileage to the political parties supporting/proposing such a change. People
would be enchanted by a proposal that reduces their net tax liabilities from existing
10-20 per cent to a mere 2 per cent!

But then how would the government make up for the loss in tax revenue? If it were
to scrap income taxes.

As per 2013-14 Union Budget, personal income tax has been budgeted at
Rs.2,47,639 Crore for the current fiscal year.

The total gross tax revenue of the govt. (including the state's share) stands at about
Rs.12.4 lakh Crore (budgeted) in the current fiscal. A two per cent Banking
Transaction Tax on current banking transaction can potentially generate about
Rs.15 lakh Crore - more than compensating for the loss.

The rich and business men have to show their total income, as everything is
coming under bank account as there will not be any currency notes (papers). So
they will pay more tax than today.

This will encourage the people to do more bank transactions and will gradually finish
the black money.