After reading my article a colleague asked me why not do away with personal taxation? A very thought provoking idea on the day when Economic Survey (ES) was released. I did think about it in line with what is mentioned in the ES and thought of sharing my views on the issue.
In the context of the idea, “Personal taxation” refers to income tax being levied on individuals. It is a fact that in a country having 125 Crores population, not many earn so much as to be able to contribute to the economy by way of direct tax. Our Chief Economic Advisor (CEA) has suggested in the ES that Public Provident Fund (PPF) interest should be taxed. While my colleague is suggesting to do away with personal taxation, CEA is suggesting tax them more. So how does one balance between the two extreme thoughts, one from a common man and another from revenue collector? Mr. CEA, I am not privy to statistics on PPF deposits, as you probably are, but am confident that almost 70 to 80% of the funds in PPF are belonging to common man who earns less than Rs. 20 lakhs a year. He sets aside his hard earned money for a lock in period of 15 years (of course subject to partial withdrawal permitted after few years) so as to secure his post work life period since majority of “common man” are not eligible for pension. Government is substantially funded for a long term period at a very nominal interest cost and Mr. CEA wants to tax that? Mr.
CEA has also mentioned in ES that 85% of the “Economy” is out of tax net? Every “common man” in this country pays tax in the form either Excise Duty or VAT or Customs Duty or Service Tax or Various Cess etc. etc. Mr. CEA and if that is so, how can one say 85% of economy be out of tax net? This is just one issue, there are many more such issues.
So coming back to the question “can we do away with personal taxation”?
I would like to put across one possible step to do this now. Let us look at it this way – Production, of a product increases when it’s demand/need increases is a basic fundamental of demand & supply theory. How can demand/need be increased? One option could be by giving more money in the hand of the consumer to buy the product. From many possible ways to do this, one could be by reducing personal tax so that “common man” will be left with more cash in hand to buy the product. FM will still get his due in the form of some indirect tax/es. So the situation could be win-win for both “common man” and FM. Now can this reduction of personal tax be to Zero? Well we all know that 20% of the activities give 80% of results. It could be worthwhile to do away with 80% of the tax payers who contribute only 20% of tax. I would say it can be done in a phased manner of 3-4 years by gradually raising the income bracket or reducing the rate of tax for existing slabs. This way the most “uncommon” (high net worth individual), out of common man, gets out of the tax net at the end. Worth trying……
Hopefully our FM is listening!!!