Why personal income tax on people earning less than Rs 10 lakh annually should stop right away
There is a famous saying that death and taxes are certain. Well, not so much with personal income tax in India. According to the latest statistics released by the Central Board of Direct Taxation, less than two per cent of Indians paid personal income tax in financial year 2015-16.
The low-income earners are exempt from income tax whereas high-earning professionals devise ways to legally avoid income tax. The actual burden of personal tax mainly falls on office-going employees and that is because employers are required to deduct tax at source at the time of paying salaries. This results in the exchequer getting a minuscule amount of less than Rs 2 lakh crore as personal income tax year after year.
So, what is the way forward? Some argue that the personal income tax regime in India is too broken to be fixed or reformed and, therefore, must be scrapped. In fact, the call for abolition of personal income tax has also come from within the ruling party, with senior leader and economist Subramanian Swamy (also a former Union law minister) constantly trying to persuade both Prime Minister Narendra Modi and the finance minister Arun Jaitley to abolish personal income tax and move towards a bank transaction tax.
According to the abolitionists, personal income tax is not only regressive but also facilitates creation and use of black money. They argue that the money that escapes taxation and subsequently takes the form of black money can be otherwise legally and fearlessly invested or deposited in banks, if personal income tax were to be abolished.
To be fair, there is merit in the argument. Abolition of personal income tax will lead to greater spending and investment. Tax exemption to fixed deposits (even otherwise) would mean that people will deposit their domestic savings (which is currently below 30 per cent due to low interest rates) in banks and banks will be able to extend loans at reduced interest rates to companies, leading to investments, growth in infrastructure, and creation of new jobs. This will give the trailing economy a long-term boost. Not only this, tax terrorism will come to an end and most of the government resources (human and non-human) could be more fruitfully utilised in implementing the newly introduced Goods and Services Tax, leading to greater tax compliance and revenue collection.
So far so good. But governments need money for general welfare and for providing basic public services and utilities including health, ration, and education. The most important point that abolitionists seem to miss is that there is no alternative today to make for the shortfall of an amount of Rs 2 lakh crore that the exchequer gets annually by way of personal income tax.
The only countries that do not levy personal income tax are oil-rich nations whose main source of revenue comes from oil exports. Besides, there is a lot of uncertainty around the current GST regime and the government's indirect tax collections are also not going to significantly increase in the near future.
Abolitionists argue that a new bank transaction tax (BTT) can be introduced so that the treasury does not feel the pinch of abolition of personal income tax. The idea of implementing a BTT was strongly mooted by Pune-based non-government organisation ArthaKranti (the organisation behind the idea of demonetisation). The government seems to have not taken this proposal very seriously, perhaps because the concept of banks deducting tax on transactions is a cure worse than the disease for many reasons. For instance, a majority of transactions today are cash-based and are outside the banking system.
Even in bank transactions, big transactions do not necessarily result into high income and, in some cases, a very small transaction may actually lead to higher income. In any event, banks are not really prepared and capable to ensure near-perfect compliance and this will be too much of an avoidable burden on them. A similar levy (on bank withdrawals) was introduced by the then finance minister P Chidrambaram in 2005, but the same was subsequently withdrawn on the ground that it was no longer necessary.
In such a situation, a reform of personal income tax is the best way forward. The real reformative idea would be to hike the personal income tax exemption limit and take out individuals earning less than Rs 10 lakh annually, who are constantly bearing the brunt of rising inflation, from the personal income tax regime.
There is nothing new or radical about this proposal. Exemption limits have always existed and the government is mulling to hike it to Rs 5 lakh in its upcoming Budget. This must be accompanied by a rationalisation of tax rates, tax slabs, and tax deductions to ensure that the tax is progressive in nature. India has an outstanding team of IRS officers who need to spend their time and energy on pursuing high-stake cases of tax evasion or aggressive tax avoidance.
This government is known - famously or not - for taking bold decisions. The idea of demonetisation aimed at tackling black money affected the entire population of 1.33 crore billion. In contrast, hiking of personal income tax exemption limit will affect less than two per cent of the population but will reap enormous, long-term benefits for the economy. February's Budget will be the government's last regular budget before the country goes for general elections in 2019. Let us hope that the government makes this a historic budget on this front.