India : no personal income tax a possibility?

Tax is an eventuality, a reality. It is a pain for the honest taxpayer, and for the dishonest as well, as they run a risk of getting caught, if evading. However, the problem is that everyone has to pay a tax, or say, contribute to the Government, if they deem capable of doing so. In India, it makes more sense, as people question the Government about the returns they get for their contribution. Bad roads, dangerous train journeys, lack of good Government hospitals and educational institutes, no support for senior citizens after their retirement, too much of pollution, and the list goes on. To add fuel to the fire, the umpteen number of scams and corruption news make one think, where is his money going and why should he fund for politicians.

Recent disclosures from Income Tax department have revealed more painful data for individual tax payers, mostly in the service sector, and hence, have initiated a new heated debates and discussions. Only approximately 1% of Indian population actually pays tax. The rest are either below the minimum tax slab OR evading taxes. Along with the data considered of number of properties or number of cars bought, it becomes certain that it is the latter reason.

People like me feel the heat for why should I be paying such a hefty amount. I am earning well because I worked hard for it. This makes no good reason for funding for those who don't pay taxes. In the recent Budget, Finance Minister reduced tax rate for those with taxable income between Rs. 2,50,000 and 5,00,000 from 10% to 5%, and in turn increased surcharge for those with taxable income above Rs. 50,00,000. Although I fall in none of the above brackets, but my issue is why are you penalizing someone who is working hard to earn well, rather than going after people who evade taxes? Agreed, Government has been trying numerous steps to catch those people as well and appropriately punish, and I am ready to wait for few years for their steps to bear fruits. I would like to see that 1% to reach around at least 5% in 3-4 years. But don't penalize the hard working rich service class people who pay regular taxes just because... TDS

I heard one of my MDs at Deutsche Bank suggesting Government should scrap personal taxes altogether and just levy indirect taxes. At first instance, I laughed this off, but later pondered over this idea. I found this actually made sense. Many countries are doing this, although it's next to impossible to replicate this in India. 

This is similar to what is currently going around as a rumour (or may be a proposal within the Government, which isn't in public domain yet) of scrapping personal income tax and replace it with the Banking Transaction Tax (BTT), where tax is charged whenever there is a transaction with the bank.

However, on my version, no personal income tax is charged but levy indirect taxes. Increase it from 15% (including cesses) to some 20-22% (or whatever) to balance the hole. People will pay on the consumption as per their capability. Tax slabs proposed by GST will solve this to a large purpose. Have 0% or lesser rates for necessities like groceries, but a higher rate for all other items. Have a ~50% charges for luxury items like cars, furniture, etc. When people won't be paying income taxes, they will be left with more amount in their accounts and shouldn't mind paying higher indirect taxes.

Increase the import duties on certain items, stamp duties on properties, etc to counter the deficit. There wouldn't be many complaints then. If you can afford, pay more for those items you use. A middle class family would weigh in what they need as comfort items and luxury items depending on their income, and wouldn't feel the pinch of having paid to the Government for nothing.

The people who evade taxes, so called, black money by Government, will feel the pinch as there will be no incentives to hide money. They will, in any case, be paying indirect taxes as and how they consume products / services. 

Of course, this has too many, just too many negative consequences, like, the rates will have to be increased a lot to counter the loss of revenues from personal income taxes. Increase in indirect rates might reduce consumption and hence GDP. Too high corporate tax might be a deterrent for entrepreneurship. Higher import duty is a difficult thing to charge on certain items.

The countries which are following this structure actually have a constant stream of revenues coming in from their core strengths, be it oil or tourism. India has none of these kind of things on which it can rely. Hence, as I said, it's good for theory but in practicality, it's very difficult to implement in India. 

So if we compare this with the BTT, one can feel that would make more sense. If you have more money, you will do more transactions with the bank and hence more contribution in the tax. However, this is possible only when the Government fulfills its current dream of making India cashless or less-cash economy, and hence digital economy. Otherwise, for people dealing in cash would never have to do a banking transaction, and hence again evading of taxes.

I still feel if debated and thought upon, we can have a certain tax structure where the rich won't be penalized and people who really deserve to be exempted are done so. Nevertheless, we really need to see some restructuring in tax collection mechanism for sure.