BUDGET 2018: Just Get Rid of Income Tax

As finance minister Arun Jaitley hunkers down to prepare India’s fiscal budget, much has changed in the tax landscape. The tax department has its heads, hands and computers full of the new goods and services tax (GST), with its ever-changing tweaks.
It’s a reform that needs enormous resources to effectively mop up taxes that will visibly fatten the exchequer. Jaitley ought to scrap dysfunctional taxes, such as the personal income tax, and focus on taxing expenditure more effectively. The twin move will likely give the economy the consumption boost it needs.
India’s relationship with avoiding income taxes is the stuff of movie plots. People living in lavish homes, driving luxury cars and shopping for expensive art and jewellery often do not even have a Permanent Account Number (PAN) card necessary for those with taxable income. It’s also the country where the underlings serving the rich — from domestic helps to chauffeurs — have assets and property to their name, which far belies the few thousand rupees they earn every month.
The rich go to creative lengths to avoid paying taxes. Even the middle class spend hours with accountants to find ways to pay less taxes.
The result is that in a country with a population of more than a billion, barely 2% pay income tax. And that’s mostly those who draw a fixed salary that is tax-deducted at source.
It’s easy to see why millions of Indians do not want to pay any income tax. For a start, transactions are mostly cash in an unstructured environment, making evasion hassle-free. How does the government track income for the local plumber fixing a leaky pipe, or the local vegetable vendor selling to households? It’s nearly impossible.
Then, for those of us who do pay taxes, there are constant reminders of how little we get for our taxes. Even in India’s capital, the infrastructure is anything but world class, save for the Delhi Metro. Outside the cocoon of Lutyens’ Delhi, where the ruling class and bureaucracy reside, streets are pockmarked with potholes, power outages are frequent, personal safety is suspect, the air is dirty and none of the public services work like they should.
Taxpayers, forever envious of tax evaders, are forced to privately provide for themselves what the State should: be that private guards in their neighbourhoods, inverters for electricity, or private schooling for children. Mostly, they live in a continuous cycle of double taxation: once in legitimate taxes to help improve infrastructure, and then out-of-pocket expenses to plug the gap in services their taxes should have paid for.
Worse, while companies are always taxed on the income after expenditure, individuals are taxed on income before expenditure. Overall, there is little by way of example to incentivise tax evaders into becoming taxpayers.
Scrapping personal income taxes, on the other hand, will end both covert and thrifty spending. It will free up incomes that could find their way to services ranging from travel to home improvement. It will also give a fillip to consumables from groceries to gadgets. The knock-on effect will create a demand for goods and services that will bolster economic activity. Ring-fenced with tighter GST monitoring, the government might have a winning formula.
To capture tax from the super-rich, Jaitley needs to recast the GST slabs to impose a far higher tax on luxury goods and services, ranging from lavish experiences to posh cars. Indian citizens taking money out of the country for buying assets such as property, investments or other big-ticket items should pay a reasonable tax — which will help offset losses from scrapping the meagre collections from personal income taxes.
Ultimately, the move might also help the ruling party make good its 2014 poll promise of radical moves in taxation. The middle class could do with a dose of achhe din, before the next general election.
(Writer: Ms. Anjana Menon, in Economic Times 16 January 2018) more