Thursday, January 9, 2014

Income tax and Indirect tax abolition to positively disrupt Indian economy

"The most important thing to do today is to generate enthusiasm. No economy can improve if people feel defeated and become risk-averse. Therefore, we have to bring the positive feeling back by implementing measures that would revive the outlook. The other step that should be taken is increase the savings rate, help people save more, as this would translate into more investment which in turn would boost growth."

-- Dr. Subramanian Swamy 

Nearly 35-40 million Indians pay taxes annually; however, only 1% of the total tax payers account for a major chunk of tax collections. For the remaining tax payers, filing returns is a complex process involving extensive paperwork. While skeptics highlight an annual loss of INR 2.47 lakh crores of revenues; they tend to overlook the inherent benefits (monetary as well as non-monetary) that will accrue with such a system. Moreover, the system of zero taxation is also working effectively in nearly 15 other countries around the world.

In case India implements a zero taxation system, then it will trigger several benefits in the economy which will herald a new era of economic development and progress for the country. Some such triggers are further explained below:

Will integrate Black money into mainstream economy
Black money economy is controlled by 3% of India's population; however, it influences 97% of the remaining population. Such a large influence indicates the extent of black money penetration in India's economic system. It also highlights mistrust in the banking system due to implications related to tax obligations. Therefore, many continue to avoid deposits in banks as it might attract tax obligations. 

"At least $70-80 billion goes out every year. The cost of India's black economy is 5% of GDP growth sacrificed every year since the mid-70s. But for this, India's size of the economy would have been $9 trillion." 

-- Arun Kumar, Professor of Economics at JNU 

Income tax abolition will not only increase deposit levels in banks, it will also enhance the transparency of financial transactions. While spurt in deposits will enable banks to fund diverse projects in the private and government sector; transparency in transactions will help in minimizing law and order issues which arise due to black money funding.

Income tax abolition will usher an era of transparency whose trickle down effect will have positive ramifications across each section of the society.

Affordable housing
Majority of real estate transactions involve heavy inflow and outflow of black money as it helps the sellers to avoid capital gains tax. While a regular investor may not make an impact; other investors (criminals, politicians and anti-national elements) leverage this inherent weakness of the sector to park their ill-gotten money. Moreover, investors and their syndicates artificially increase the value of real estate market. This reduces the affordability of residential properties among the regular middle income people. However, greater thrust on bank transactions will burst the real estate bubble and eventually help in the rationalization of real estate prices. 

If the government manages to channelize 50% of black money in banks, then black money will gradually lose relevance in real estate transactions. 

Inflation will come down
India's taxation system has become intricately complex and comprehensive whose entire purpose is to suck away maximum cash out of the income earning individuals through the route of tax. Apart from income tax, the government charges indirect tax in the form of service tax, education cess, surcharge and excise which inflates the prices of products and services by 35%. In case the government does away with such a system, many citizens will be able to enjoy products and services at drastically low levels. This will augment India's GDP to higher levels and will also help in increasing the per capita income. 

Abolition of income tax and other indirect taxes is pure-play economics which will influence India's growth positively and also enable it to become a crime free destination.