Hello, friends! Imagine, our Prime Minister appears on the TV tonight to make an announcement. "Friends, to protect you, to protect your family, 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. 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 post.
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| What If India Has 0% Income Tax |
Direct Taxes And 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 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 goods 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. 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.
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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 easier to hide their income and evade paying tax, than compared to a salaried taxpayer. Because when a common man gets a salary, the income tax is already deducted from the salary before being paid. On top of that, agricultural 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 7lakh 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?
Advantages of Zero Income Tax
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 favour 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 boost 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, Now let's see the potential disadvantages of doing this.
Disadvantages of Zero Income Tax
The biggest and clear cut disadvantage will be the revenue loss of the government. Look at this graph to know the exact revenue loss. From data, 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?
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New Sources of Income
The people favour the abolishment of income tax, they argue that to some extent, it wouldn't even need 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, 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 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 compared to inheritance tax. 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 favourable 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 favour of the common man. In the favour of the citizens.
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