The idea of ending income tax has sparked a global debate, especially after former US President Donald Trump proposed scrapping personal income tax in the US. In India, Subramanian Swamy, the outspoken economist and politician, has been advocating for the same for over a decade. He recently urged Finance Minister Nirmala Sitharaman to announce the abolition of income tax in the upcoming Budget speech on February 1. But is it really that simple? Let’s break it down.
Why End Income Tax?
Proponents of ending income tax argue that it would put more money in the hands of common people, boost consumption, and stimulate economic growth. Subramanian Swamy has long claimed that income tax is a burden on the middle class and that its removal would benefit millions. Trump’s proposal in the US has reignited this debate, with many wondering if India could follow suit.
However, critics point out that income tax is a major source of revenue for the government. In India, it accounts for a significant portion of the central government’s tax collection. Removing it without a viable alternative could create a massive fiscal deficit.
Can India Afford to Scrap Income Tax?
The short answer: It’s complicated. India’s tax structure relies heavily on personal and corporate income taxes. In the financial year 2022-23, income tax contributed over ₹14 lakh crore to the government’s coffers. Scrapping it would leave a gaping hole in the budget, forcing the government to either cut spending or find alternative revenue sources.
One possible alternative is increasing indirect taxes, such as GST. However, this could disproportionately affect lower-income groups, as indirect taxes are regressive in nature. Another option is expanding the tax base by bringing more people into the formal economy. But given India’s vast informal sector, this is easier said than done.
What’s Stopping the Modi Government?
Subramanian Swamy has often criticized the Modi government for not being “pro-common people,” suggesting that this is why they won’t abolish income tax. While the government has made efforts to simplify tax laws and reduce rates, completely eliminating income tax seems unlikely in the near future.
The Modi administration has focused on increasing tax compliance and using technology to curb evasion. Initiatives like the Goods and Services Tax (GST) and the faceless assessment system have been steps in this direction. However, these measures are a far cry from doing away with income tax altogether.
Potential Impact of Ending Income Tax
If India were to abolish income tax, the immediate impact would be a boost in disposable income for individuals. This could lead to higher consumer spending, which in turn could drive economic growth. However, the long-term consequences are less clear.
Without income tax, the government would need to find other ways to fund essential services like healthcare, education, and infrastructure. This could mean higher indirect taxes, increased borrowing, or cuts in public spending – all of which come with their own set of challenges.
Conclusion: A Radical Idea with Unclear Outcomes
While the idea of ending income tax is appealing, its implementation is fraught with complexities. Subramanian Swamy’s proposal may sound revolutionary, but without a clear plan to replace the lost revenue, it remains a distant dream.
As India prepares for the 2025 Budget, all eyes will be on Nirmala Sitharaman to see if she addresses this radical idea. For now, though, it seems that income tax is here to stay – whether we like it or not.