Axe the Income Tax

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As per the Income-tax Department, the number of people who filed Income-tax Returns (ITRs) in AY 2023-24 was 8.18 crores. Of these the number of people who paid taxes was 2.24 crores. Rest filed NIL tax returns. This means ~ 2.3% of the working population in India actually pay income tax.

That seriously calls for a thought on whether we need to have income tax in the country and a huge bureaucracy to manage the income tax collection. The government should seriously consider scrapping the income tax and broad base the tax structure by either only having indirect tax or having some alternative mechanism like a ‘Banking Transaction Tax’.

Scrapping Income Tax will increase the disposable Income and people will have more money to spend, potentially boosting consumption and economic growth. It will also eliminate the complexities and administrative burden associated with income tax filings and reduce tax evasion thus improving overall compliance. More disposable income could lead to higher savings and investments, potentially boosting capital formation.

Yes, it will be a revenue loss for the government and increase the dependence on indirect taxes like GST, but it will be more equitable and broader based. Increasing taxes on wealth, property, and luxury goods could be an alternative to income tax, targeting higher-income individuals more effectively who are otherwise not in the income tax bucket.

Replacing income tax with a banking transaction tax (BTT) is another idea that has been discussed in various contexts but not seriously explored. A banking transaction tax involves taxing all transactions conducted through banks, including deposits, withdrawals, transfers, and payments. The potential benefits are that BTT could simplify the tax system by eliminating the need for filing income tax returns and reducing administrative burden. Since transactions through banks are easily trackable, a BTT could potentially reduce tax evasion and improve compliance. It will also encourage digital transactions, which can reduce the cash economy and improve financial transparency.

There are some shortcomings though like it being regressive and disproportionately affecting small transactions and low-income individuals who rely on frequent banking activities. The same can be addressed by having a minimum threshold on which BTT will not apply. Setting the appropriate tax rate is also crucial for its success. It needs to be low enough to minimize economic distortions but high enough to generate sufficient revenue.

The alternative can also be a combination of BTT and Indirect Tax. Whatever be the alternative, it is time to axe the income tax since the government will never be able to implement it in all fairness given the pulls and pushes of various interest groups. The minority of salaried employees will always carry the burden of income tax!