Replacing income tax with expenditure tax is the successful reform India needs


Each stimulus package aimed at stimulating the economy has its own impact on the country’s fiscal position. However, stimulus through tax reforms will be more helpful in building resilience in the economy in a sustainable manner. Finance Minister Nirmala Sitharaman seeks suggestions from stakeholders with a view to finalizing the annual budget for 2022-2023. It is high time to opt for an original initiative on the personal income tax front. There is an opportunity to stimulate direct tax reform in the form of an expenditure tax, which will be a more rational substitute for income tax.

If personal income tax is removed, about 6.32 crore people will be relieved of the burden of submitting annual income tax returns (ITRs). The RTI has a demoralizing effect on the growth of new entrepreneurs and emerging start-ups, as they are not exempt from personal tax obligations. Income tax regulations require people to maintain and submit various records and returns. The Income Tax Department tirelessly reviews millions of returns, which are followed by questions, clarifications, refunds and extended correspondence. Litigation, if any, lasts for years, making both citizens and government pay. The various organizations that comply with the TDS will also be relieved of the burden of collecting, submitting and submitting various returns if personal income tax is suspended.

There are several countries such as United Arab Emirates, Qatar, Oman, Kuwait, Cayman Islands, Bahrain, Bermuda, Saudi Arabia and Brunei Darussalam where you do not need to pay tax on the income. However, the inhabitants of these countries must contribute to social security. Some of these countries are well-known tax havens, while most of the others have successfully used natural resources to finance public spending.

Harassed employee class

Income tax is largely levied on middle-class workers. The rich have dividends and capital gains as their main source of income rather than wages. According to data from the Income Tax Department, only 8,600 people revealed that their annual income was over Rs 5 crore. About 42,800 people reported taxable income over Rs 1 crore per year. In addition, four lakh people with income above Rs 20 lakh and constituting 1% of the tax base, account for 63% of the income taxes collected from individuals in an economy with a tax base of around 1.5 crore of people. Thus, 99% of Indian taxpayers are forced to file their ITRs, while they pay a tiny amount in tax under one pretext or another. The people who pay are mostly employees as they cannot escape taxes as these are deducted as TDS.

Personal income tax is only actually levied on salaried natural persons. All the other categories escape it in a way by adopting different methods. The salaried class pays income taxes and then spends the net income, while the non-salaried classes spend money under various expense items and reduce their tax liability. Rental, telephone, electricity, national and foreign travel, water and entertainment expenses are part of the tax deductible expenses for the business and liberal profession category.

Only 2,200 doctors, accountants, lawyers and other professionals reported annual income of over Rs 1 crore from their profession. Large farmers pay virtually no income tax. Even political parties are careful not to pay taxes. As Prime Minister Narendra Modi revealed at a summit in February 2020, only 1.46 crore of individuals are subject to income tax, which is less than 1% of the population.

For the year 2020-2021, out of gross tax revenue of Rs 24,23,020 crore, income tax has been budgeted at Rs 6,38,000 crore, which represents 26.30% of total revenue. Corporate tax Rs 6,81,000 crore (28%), GST Rs 6,90,500 crore (28.5%), excise duty Rs 2,67,000 crore (11%), customs 1,38,000 crore Rs (5 , 70%) and service tax Rs 1,020 crore (0.045%).

Generation of black money

It is a general tendency among people to evade taxes. Tax planning or tax avoidance is considered a legitimate right to reduce the tax payable. However, fraud is a crime. At the same time, there is an economy of black money blocked in the form of properties and gold. If personal income tax is replaced by expenditure tax, then there will be no possibility of converting real income into black money through tax evasion and all funds will be available to investors. productive purposes of the economy.

Bank credit creation

Banks typically keep 3% of the deposit below the cash reserve ratio (CRR) and lend 97%, including the statutory liquidity ratio (SLR) requirement. This is because 97% will return to the banking system as deposits, which will lend again keeping 3%, and the process will continue indefinitely. It is the process of creating credit by banks. If black money comes into the bank as a legitimate deposit, it will dramatically increase the money supply and hence productivity as well. It will also significantly increase the lending capacity of banks.

The result

Expense tax is very similar to income tax, except that the tax base is the expense, not the income. Expense tax rates can be highly progressive to heavily tax the rich. It would be even better off because much of the spending of the rich is on capital, which is usually not affected by income tax.

India should explore the possibility of replacing income tax with an expenditure tax. Shifting from the income base to the expenditure base will not only alleviate the adverse effects and inequalities of a non-aggregate income tax, but will also reduce extravagant consumption and promote savings to a much greater extent. than the current system promises. Another important gain will be to place part of personal taxation on a family basis without imposing high marginal charges on the income of working women. The expenditure tax will be a successful reform with immense potential to boost the economy.

The author is vice-president of the Punjab State Planning Council and president of ASSOCHAM, Northern Regional Council. The opinions expressed in this article are those of the author and do not represent the position of this publication.

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