How innovative can budgets be? Can the National budget to be presented next month be innovatively disruptive? Can it sway the voters to BJP irrevocably? Can it be the ‘X’ factor that the BJP is looking for?
Can this budget completely abolish income tax? Currently, a fourth of the central government’s revenue accrues due to personal income tax collection. Are there alternative ways of raising resources, apart from IT to fill the breach? Will the breach, breach the defences of BJP if implemented?
About 50% government revenue is due to direct taxes and the rest is by indirect taxation, such as GST and excise duties. GST accounts for about 30%, Corporate Tax, 28%, Income Tax 26%, Excise 11% and Customs 5%.
Approximately eight crore people or about 5% of 1.30 billion file their tax returns each year. It however, does not tell the entire story for, rest of the people, including the 8 crores, pay GST or indirect taxes, on everything they buy through the organised markets. Even as 40% of the population is either employed or looking for work, only about 3% have an annual salary of more than Rs 5 lakhs. Those with less than 5 lakhs are exempted from the tax net. Further, 50% of the population is engaged in agriculture where again several services are exempted from tax net.
Some premises for people to not pay IT and hoard wealth, is their belief that only a few are burdened with taxes, lack of conviction in the tax systems, cynicism towards government schemes and a belief that they are unreasonably high. Probably, evading tax makes a better financial sense for them. The National Council for Applied Economic Research (NCAER), reports that the illicit wealth, in the country amounts to anywhere between 400 to 500 billion dollars, almost 15% of the GDP.
India is also witnessing asset price inflation. Housing prices, as well as other commodities such as gold, have all risen many times over. People aim to escape IT by investing money in these assets where prices are highly inflated. Therefore, abolishing IT has advantages.
There is a premise and a promise. If the premise was to hoard, the promise is that such illegitimate money would be back in circulation. Such money, diverted to new projects and more development works, could help re-distribute the illegitimate wealth within more people. While more money in the hands of people results in expansion of the economy due to higher spending, how sustainable it will be in the long run is a matter for research given that uncertainties will be difficult to factor in.
If the abolition of personal IT were to be done, the government would lose about a fourth of its revenue with immediate effect. Besides this, the fiscal deficit that was 9.3% of the GDP last year, would escalate further. Hence even as we debate abolition, we must also explore methods that make good the losses.
Direct taxes help governments all over the world, to fund welfare programs of the poor and in building infrastructure, including public works, healthcare schemes, science research, defence, law enforcement and general public utility programs such as electricity, water and waste control. No government would risk holding up welfare programs for the poor by engineering a crisis of shortfall in revenue. Political exigencies must be tempered with nose to the ground.
Yet there are ways to counter shortfalls in revenue and they must be found especially, if there is a value proposition in the form of political gains. For one, GST rates could be raised. Excise on certain goods and products could be raised as was done during the pandemic. An inheritance tax, or a tax on people who inherit their ancestral properties/savings can be levied in varying slabs. Even levying taxes on expenditure and bank transactions instead of income could be a good idea. Reducing government compliance costs and laying greater emphasis on productive jobs is a win-win.
The old-fashioned fiscal concept that income tax rates must be elevated in order to provide the state with more income is not a viable proposition anymore. Similarly, inducing liquidity by reducing TDS/TCS liability may not be useful. Surely, the idea of doing away with income tax has arrived.