Abolish Income Tax...

Abolish Income Tax…

Harvard Professor, Economist, Independent Thinker, and current BJP ideologue Mr. Subramaniam Swamy’s maverick suggestion of a few years ago to abolish Income Tax has come back to the table. This time, for serious consideration by the BJP. Earlier, Swamy, in his political party of one, had mooted it as his personal opinion.

Now, the abolition proposal is combined with a plethora of other taxes such as Sales Tax, Excise Tax, Service Tax, and several other indirect taxes that have cropped up since. The Pune think-tank which put the presentation forward, wants them all discontinued. This very attractive idea, at least for the much burdened 35 million urban Income Tax payers, will definitely prove very popular if presented as an election promise.

The proposal may well be included in the BJP manifesto for the 2014 general elections.  Certainly, BJP needs a big and popular economic idea to counter the massive Congress welfarism and the fledgling AAP’s one note samba on corruption!  Abolishing these vast network of taxes, paradoxically will both cut costs, red-tape and corruption, and actually increase the Government’s take on a much surer basis via a new Bank Transaction Tax contemplated at  1% to 1.5% on every transaction.

Mr. Nitin Gadkari, the former BJP President, heads the committee that is working on the BJP vision document, and Mr. Swamy is the committee’s convenor. They revealed this proposal under consideration at an interactive session with industrialists at the PHD Chamber of Commerce recently. Though it sounds too-good –to-be-true, it was naturally enthusiastically received.

This get- rid- of-taxes idea is combined with a less feasible proposal to abolish Rs. 500 and Rs. 1,000  currency notes. In an this era of high, 20% per annum retail inflation, and a massive underground economy that parallels the ‘official’ one, taking out the high-value notes will not work.  Also, to directly attack the Black Economy will be dangerously destabilising. But like the famous Laffer Curve which shows greater tax compliance with lower tax rates, cited by Mr. P. Chidambaram for slashing income and corporate tax rates in his then ‘Dream Budget’, this move too will encourage  people to not conceal income over time.

And as Yoga Guru and BJP- backer Baba Ramdev, though no economist himself, said: prices of goods, services and things will come down to half if these taxes were to be jettisoned. It is true enough that the tax load on everything is of that order currently. This move would likely have a massive deflationary effect, but there is still the ‘imported inflation’ via our 80% petroleum needs to consider.

But, cutting taxes will certainly encourage savings, business, industry, services, FII and FDI investment, etc. and go some way to obviate the need to conceal income, the Bank Transaction Tax notwithstanding. Currently, it is difficult to invest black money in the white economy, except via elaborate ‘laundering’ operations.

And the change will probably have a good effect on the value of the rupee. Of course, the rupee value is also dependent on the bringing down of the fiscal and current account deficits, the cutting unproductive Government expenditure, the growth in the GDP, its composition, food prices/agricultural yields, industrial productivity, commodity prices, imports versus exports, banking efficiency, the monsoon, peace on the borders, and several other issues.

This radical idea will take some thinking through, but nevertheless has an undeniable transformational potential.  And, it may serve to steal some of the Congress and AAP populist/wefarist thunder with its urban- voter- friendly out-of-the-box thinking.

For those who are alarmed with this radical suggestion, let us highlight the fact that many of the taxes such as excise, service, sales, octroi, and VAT are routinely evaded resulting in budgeted shortfalls. They are also sources of acute corruption and collusion with the Government agencies overseeing their administration. The multiple taxation regime is also inordinately expensive, sometimes more costly than the collections it yields, bewilderingly ambiguous, complex in its applicability and exceptions. It has such with wide areas of official discretion, that it is very difficult to administer honestly no matter how well-intentioned the top people may be.

The abolition idea is said to have both the Party President Rajnath Singh and the prime ministerial candidate Narendra Modi’s backing. And now Baba Ramdev has thrown his activist’s weight behind it as well.  Former Finance Minister Yashwant Sinha is apparently against the idea. But perhaps he should reconsider. This is an election of populist ideas against which staid and conventional good economics does not look too attractive. Sinha’s objections are to the feasibility of the Bank Transaction Tax of 1 to 1.5% on every transaction, because he doesn’t think the banks can administer it properly.

Gadkari however expects the number of banks to rise substantially with new banking licences on the anvil. Mr. Sinha must be worried about Government coffers not being directly filled by tax officials, and some degree of loss of control over the finances outsourced to banks. But, he must be aware that it costs more to collect these various taxes via the huge and inefficient departmentaI apparatus, than the actual yield.

Income Tax has long been a notoriously losing proportion, as well as a source of ‘on-demand’ harassment.  Very few of our apparently eligible citizens who are not Government or Corporate employees with their tax deducted at source, actually pay the correct amount of Income Tax despite the CBDT’s efforts. Income Tax payers number only 35 million souls, even after 66 years since independence, out of a current population of at least 1.2 billion!

It is also true that bank transactions presently account for some 20% of the total. In other words 80% of all business transactions are conducted in cash. But the Government is much more likely to get more of the black money into the official system if there is no multiple taxation. And a lot of money, running into trillions of dollars by some estimates, stashed abroad, could find its way back voluntarily.  

(991 words)

January 5^th 2014

Gautam Mukherjee