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Personal income tax should be abolished

February 12, 2001

Mahesh protests against the Rs. 5000 income tax rebate that women tax payers get. He favours abolishing it since it obviously will get frittered away on clothes, entertainment, etc.

He doesn't realise that there is a far greater evil that needs to be abolished.

And that's personal income tax for everyone!

Yes, you heard that right. I strongly believe in abolishing personal income tax completely.

Has Madhu lost it, you wonder? I assure you that I have perfectly logical reasons for this. Ready? Let me start...

Fact no. 1
As we all know (well, some of us anyway), there are only about 20 million taxpayers in a country of over 1 billion people. That puts us taxpayers at only 2% of the population! Yes, just a measly 2%. We're not even close to touching double digits here. What's more, personal income tax (not corporate income tax) is only 3% of the GDP! In other words, it's contribution to the national kitty is pretty much negligible.

Fact no. 2
The savings rate of Indian families has been falling each year. This means that more people are saving less. Apart from the impact on the net worth of individuals/families, this affects the economy seriously too. If people save less, they also spend less. The most immediately hit sector is the FMCG sector, and of course, everything that people buy with money gets hit. If people buy less, industrial growth slows down. If the industry slows down, companies have lower sales, which mean lower tax. Lower tax collection means the government has less money to spend on important things like infrastructure, education, and health. Lower sales also mean companies can't invest in growth and expansion, which is bad for everyone. I could go on, but this is a vicious cycle. You get the idea, right?

Fact no. 3
The IT department is nothing more than one giant harassment machine. In fact, the system punishes honest tax payers and makes tax evaders out of them. For those who don't know what an IT return scrutiny is, it's when the IT assessing officer picks up some returns at random (well, not totally at random) and scrutinises it in minute detail. If he finds or suspects a discrepancy, he can issue a notice to you and you then have to explain every detail of your income and possibly every transaction in your bank statement.

Here comes the rub. Get this: your chances of having your return scrutinised increases with your total declared income and with the tax bracket that you fall into. In other words, if you make Rs. 10 Lakhs per year and fall into the 30% bracket (that's 35.2% now with all the surcharges), your return is more likely to be picked up than if you were making Rs. 2 Lakhs and fell into the 10% bracket.

Now, that by itself isn't too bad. But... there's another gotcha there. The assessing officer is answerable for any return picked up for scrutiny and doesn't result in any additional tax being levied. The officer's career path is also dependant upon how much tax he manages to extract out of us poor souls. That essentially means that even if you're as straight as an arrow in all your financial dealings, the tax buggers will try and squeeze even more out of you.

See how this encourages tax evasion? All honest citizens fear a tax scrutiny, as it means nothing more than continuous harassment from the IT department. And here's the icing on the cake: if you want to file an appeal against the officer's ruling, you have to submit it to the same bloke who actually made the ruling! Yes!!! It's up to him whether the appeal is admitted in the first place. This is like appealing against a court ruling, but having to submit your appeal to the same judge that you think is wrong! Does this make sense? Is this not totally out of this world? Yes, it happens only in India.

All this just means that people will try any legal (and illegal) means to try and keep their declared income as low as possible. And the IT department puts out ads saying "Pay your tax. Hold your head high." Bah!

Fact no. 4
Due to the oppressive tax regime of Indira Gandhi (tax rates were as high as 97% at one time; I shit you not), a giant "parallel economy" exists, and it is rumoured to be as big as the "real economy". Um, that's "black money" for you folks who like it simple. This money is unaccounted, officially doesn't exist, and therefore cannot be channeled into useful things like investments in infrastructure, development, or just about anything that can help the economy. Why does this exist? Because the cost of keeping this money out of "official eyes" is much lower than the tax rates in the country. People don't mind paying up to 10% if it means they can keep it safe from the government. This isn't helping anybody. Letting this money out into the open would mean a significant boost to the Indian economy, and boy does the economy need that boost!

So... how will abolishing personal income tax help matters? There will be no noticeable effect on government revenue. As I've pointed out earlier, it's contribution is negligible. But look at the wave of good it will do:

1) It will mean the end of the harassment from the Income tax department for honest taxpayers.

2) People will save more money. This will translate into increased spending on consumer goods. Increased spending will mean companies make more money. If companies make more money, they can invest it further for growth and expansion. It also means that the government makes more money by way of corporate income tax. And since corporate income tax is a flat 38.5%, more money will flow into the government coffers. Want the icing on the cake? Apart from direct income tax, revenue from indirect taxes like excise and sales tax will also go up, giving the government even more money! Hallelujah!

3) Most importantly, the entire "parallel economy" (well, a lot of it) will come out of the shadows. People will now be able to flaunt their money without fear, and this means they can spend it freely. Once again, this leads to greater industrial growth (see point no. 2 above). If the parallel economy is really as big as they say it is, this could give the Indian economy that inflow of investments that it so badly needs.

Does this sound so bad? Doesn't it warrant serious consideration? If giving up 3% of your GDP can bring in so much money into the system, isn't it a measure the government should take immediately?

So forget about abolishing rebates for women. Just scrap income tax totally.


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