Naavi.org

A discussion has now ensued in India about the possibility of personal income tax being completely abolished if BJP comes to power. This proposal though is in the initial stage of discussion and yet to be adopted into the manifesto of the party for the forthcoming Loksabha elections, has already evoked lot of interest both from the economists and politicians.

There is no doubt that the proposal will be received well in those markets where AAP is gaining strength and hence it is a good political policy. However what is also required is to discuss the proposal from the point of view of it’s economic impact.

The undersigned welcomes the move for its revolutionary potential to reform the tax regime in the country. At the same time it is felt that some collateral measures would help in making the proposal work to long term benefits to the economy.

A good perspective on the subject is found in First post which is worth reading.

It is estimated that the current revenue from direct taxes in India is of the order of Rs 250000/- crores.  If therefore the proposal has to be given a serious concern, there has to be counter measures to offset this revenue loss.

It is also expected that if the proposal is introduced,  there will be an increase in the inflow of funds from professionals and businessmen to the Banking sector. (It is expected that the abolition of IT would presently be in the non corporate sector).

It is stated that 99% of the tax payers contribute insignificant amounts to the revenue kitty. It is only the top 4 lakh persons who contribute to the revenue in a significant manner.  Hence the abolition if it comes through will provide relief to early 4 crore voters in India who need not file IT returns. The current regime of Mr PC is obsessed with expanding the tax base and hence has built up a large number of irrelevant tax assessees. These are also the persons who feel harassed when IT officials raise needless queries on trivial transactions. The enormous saving in manpower arising out of leaving the 4 crore assessees from the tax bracket would add to the productivity of the economy.

One suggestion that is being discussed to offset the loss of revenue is an “Expenditure Tax” where a Bank customer would be taxed on the amount of “Net withdrawals from the Banking system”. However such a proposal would be counter productive since it will bring back the problems to the assesses in a different manner. It is therefore better if no such expenditure tax is considered. However there would be some increase in the demand for manufactured goods and an increased inflow in the indirect taxes.

In such a scenario, there would be a need for placing some incentives for public not to spend indiscriminately and adding to inflation. It would therefore be essential to encourage public to retain funds in the Banking system itself. An interest rate regime based on the volume of deposits can encourage increased savings accumulation in the Banks and avoidance of an incentive to have multiple bank accounts and carrying of benami accounts. What this means is that interest rate surcharge is paid to the depositors on the basis of deposit slabs. Eg: Deposits over Rs 1 lakh  will have an incrementa interest of 0.25% over and above the rate otherwise payable. Similarly deposits abo r Rs 5 lakhs can be paid a higher interest of o.5% etc.

At the same time, Banks need to invest the increased funds in a productive manner. For this purpose it would be advisable that the Government/RBI initiates some action on channelising Bank funds to the manufacturing sector by incentivising lending for Capital Expenditure on a long term basis. In other words, term loans for 5+ years to the manufacturing sector need to be encouraged. This can be done by providing some SLR/CLR exemptions based on long term lending to manufacturing sector.

Such a move would also provide a push to the stock markets particularly to the manufacturing sector besides banks.

In summary, abolition of Income Tax is exciting. At the same time some changes in the Banking sector would make it even more exciting.

I wish the think tank of BJP considers such additional proposals for Banking sector reform along with the proposal for abolishing the income tax.

Naavi