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First the statistics –
India has around 32 million income tax payers or about 2.5% of its population pays personal taxes. Of these barely 40,000 odd earn over a crore (officially!) and 4 lakh odd earn over Rs. 20 lakh. 63% of the total personal tax revenue generated is collected from these 4 lakh people earning above 20 lakh. This means around 99% of the 30-40 million tax payers contribute to less than 40% of the Rs 2.47 lakh crore revenue generated from personal taxes. This Rs 2.47 lakh cr in turn makes up a little over a quarter of the Rs 8,84,078 Cr of the centre’s net tax revenues.
Assuming that sales and excise taxes remain untouched, an abolition of the income tax as is being hinted over the past month by various quarters in the BJP would still leave a big revenue gap for the centre to fill. The opposition party has pitched for a single banking transaction tax to fill this hole while others have suggested that increased disposable incomes as a result of tax abolition will result in higher collections of excise and service taxes helping recoup the losses that would arise out of such a proposal. No income tax will also mean no tax deductions which in turn will mean more savings, helping bridge the revenue shortfall. Costs related to the bloated tax infrastructure regime including on overlapping departments, employee overheads etc will come down, further reducing costs.
How much of an addition to excise and service taxes an abolition of income tax will bring about is difficult to guestimate. What can be approximated however is how much a banking transaction tax levy will earn the exchequer.
“The “Private Consumption” part of the GDP is about 60 percent, or about 60 trillion rupees; if transactions add up to about this amount, a 1 percent transaction tax will give around Rs 600 billion (Rs 60,000 crores). Even if we push that up to Rs 1 trillion (1 lakh Cr), that’s just 10 percent of revenue foregone that is replaced” writes Deepak Shenoy for www.capitalmind.in.
There are also other technical issues relating to the banking transaction tax proposal that need to be dealt with. First and foremost is the cascading effect such a tax will have. If my housing society for example raises a bill on me for onward payment to the municipal corporation, I would need to do a banking transaction to pay the society which will do another banking transaction to pay the municipal corporation, resulting in double payment.
“This cascading effect will have to be corrected either through an offset mechanism or a reduction of the rate of tax” says Shailesh Haribhakti - Chief Executive Officer and Managing Partner at Haribhakti Group who also suggests that ways to make this tax non-regressive will need to be considered so that those in the lower income group don’t get taxed more than those in the higher income strata.
Rahul Garg who leads the direct tax practice at PwC India agrees.
“The experiment on expenditure tax shows that the tax gets similarly levied on similar kind of expenditure irrespective of the ability of the payer to bear such taxes. It is extremely difficult in a country of our size & variety to get the right classification for determining the rates of expenditure taxes that ultimately result in equitable and just levy on citizens and businesses.”
Ensuring that tax collected at source percolates through the system will also remain a challenge feel experts. A tax levied on banking transactions rather than encouraging people to use the banking system could create barter arrangements fears Mukesh Butani, Managing Partner at BMR Legal.
“It is impractical and cannot be implemented within the existing framework of the constitution. Taxes are levies which enable the government to meet its social obligations and create infrastructure. You cannot substitute that with a transaction tax. That will create a parallel economy and encourage people to stop banking” says Butani.
Globally, the goal of governments has been to increase taxes. India too joined the bandwagon by levying a surcharge on the rich in the budget last year and the consensus among experts seems to be that swimming against the tide will be difficult. Moreover taxes on incomes have risen from less than 1% of the population 10 years ago to about 3% of the population today and income tax as a component of the overall tax revenue has been growing even as other taxes have fallen below budget estimates. In FY13, the centre managed to collect Rs 10,309 Cr more through taxes on income even as other items like corporation taxes, customs and excise duties fell short of budgeted estimates.
The objective, rather than eliminate taxes altogether should be to rationalize rates and widen the tax net by improving compliance. A midway compromise could also include eliminating tax on incomes below 20 lakh in order to boost sentiment among the middle classes, spur growth and improve demand suggests Uday Ved – Head of Taxes at KPMG.
That would be good music to ear, politically profitable and not as radically disruptive as what’s being advocated currently.
