We’re well aware that in India, fewer than 5% of the population pays income tax. But ideally it should be around 15-20%.
There are several problems with this situation:
It’s unfair that a significant group, specifically those with agricultural income, is exempt from income tax. While this might have been necessary in the past, it’s currently an unjust exclusion. This also leads to a lack of empathy from non-agricultural income earners towards the issues faced by the farming community.
This exclusion is often influenced by political considerations for electoral votes given to individuals from other income categories.
- Salaried employees.
- Small business owners.
- Self-employed.
They feel that the national tax system is biased, with certain groups receiving favorable treatment.
This sense of injustice and inequity leads to efforts by taxpayers to reduce their income tax burden. Often through the concealment of income sources or the interpretation of tax laws. This can transform individuals with integrity into perceived tax evaders.
Not only does this lead to supposed tax evasion, but tax authorities also employ technology to detect what they perceive as lapses in tax payments or tax evasion. The entire national tax administration focuses its efforts on less than 5% of the country’s contributing population. Which is an inefficient use of national resources and a concentration of power.
Many educated and qualified Indians leave the country joining the Indian diaspora. They perceive injustice in income tax laws, particularly when they begin earning income. This hinders the nation’s development.
India is in a stage of national economic development where it requires high-quality and efficient employees and potential entrepreneurs. It needs individuals who will invest their time, effort, and intellect in productivity, innovation, and progress. However, the current regressive and unfair income tax system is discouraging good corporate and national citizenship.
The counter-argument to the above concerns budget balancing. However, an unfair income tax system damages national morale and pride. The best of the nation’s human resources are more focused on reducing their tax burden than on productive work.
Alternatively, there is a significant need to shift from income-based taxation to spending-based taxation. This approach needs serious consideration as spending affects everyone. An effective tax collection effort on spending can increase tax revenue from all segments of society.
Tax structures should adhere to three principles:
- Fairness.
- Taxpayers’ acceptance of the tax rate.
- Avoidance of excessive motivation for tax evasion.
The Indian income tax law falls short of fairness, and it’s time for a more equitable tax structure.
With the removal of income tax, there won’t necessarily be a reduction in take-home pay. This will provide individuals with more funds for spending and saving.
Additionally, removing income tax would eliminate the incentive for channeling savings into specific government-directed savings schemes (like PPF). While the government has attempted to reduce the attractiveness of these schemes in recent years, the impact hasn’t been significant.
Let individual income earners decide where they want to invest their savings based on their risk tolerance. While some may argue that this forces the savings class to take on higher risk, It’s important to trust individuals to make the best decisions for their future. If the Finance Ministry is genuinely interested in increasing individual tax collections and addressing tax evasion, they should rethink how taxes are collected.
Summary
In summary, India should explore alternatives to individual income tax. It’s a noble national cause.