Taxing matters – Tax income or tax expenditure!

Time of India

29-05-2025

Homeyar Jal Tavaria is a professional accountant with interest in the science of accounts and audit, observer and commentator on macro economic commercial, financial and economic events, occasional blogger'. LESS ... MORE
It would not be an untruth if we say that the Indian Income Tax is against all canons of taxation – it is not equitable or fair considering that major income heads like agriculture income are not taxable, that income like dividend is taxed again. A salaried employee or a retiree / pensioner with monthly income of say Rs 2.00 lakhs pays income tax but an agriculturist with Rs 7.50 lakhs of monthly income escapes the income tax net. Why and how the Indian income tax act as structured and implemented is not challenged constitutionally as an unfair legislation cannot be understood?
All the NGOs and social activists who rush to the Judiciary on matters like pollution, environment damage, illegal refugees sometimes even terrorist sympathisers, have not deemed it fit to fight against an Act that is blatantly unfair. The very fact that just 5.0% of the country's population files income tax returns (requiring tax deduction at source, advance and self assessment tax payment), shows dreadful injustice to this class of assesses, while others (agriculturists, non-formal employment practitioners go scot free).
When the political die is cast against an effective and equitable income tax act bringing people in the tax net on earnings and not type of earnings, there is a need to take a look at income tax.
Suppose the concept of tax on income is deleted, what would be the consequences for those who are income tax payers:
There would be greater cash in hand of those impacted by removal of income tax;
This increase in income will have 3 consequences – higher consumption, higher assets purchase, higher savings;
Knowing the Indian mind, a lot of higher income will go into improved children education, purchase of house, gold, savings & investments.
In India, we have made the mistake of linking certain government savings plans with eligibility for tax exemption – PPF, other government savings plans. Certain payments for life insurance, hospitalization policy premium were given income tax deduction.
All these will automatically come to an end. The earlier income tax paying individual will need to take a view on how to use the surplus cash earnings. How and what he spends on and what is the nature of his savings is now totally in the control of the individual. Since there is no income tax legacy impact – the individual will decide the % of his savings in Govt savings schemes and % of savings in private investment (corporate fixed deposits / mutual funds / capital market investment in shares) and investment in assets like residence, motor car, gold and precious metals and gems.
Since the Indian population is psychologically against the Government taking a part of his/ her earnings in the form of income and the law permits types of earnings differential treatment, one must look at the other side of the coin which is individual spendings / consumption. There is a need to take a relook at the structure of our indirect tax regime. We must remember that both central government and states share income tax revenues thru devolution. Both types of Govt benefit from higher consumption.
Tax evasion / tax avoidance / tax planning is not just in direct tax. It is very much in use even for indirect tax. Take the case of Goods & Services tax (GST). The individual has no Role to play in giving any submissions, forms, records, etc to the Indian Revenue (Tax) authorities. The submissions on GST liability come from businesses / traders / vendors, etc. All of us are aware that GST is collected from us as individuals but often not deposited into the Governments treasury (central and state). They often land up as profits for the last link of the Business to Customer chain (B2C).
As a nation we are in critical times – with such a small direct tax base of individuals following the income tax law, the increasing demand from a growing Indian economy for infrastructure / defence / education / connectivity, etc we will need to improve the Receipts side of the Budget. Remember growth rate on compounding basis will increase demand for Tax Revenues.
There are 2 options available:
Improve the indirect tax collection where there is no doubt there is significant tax evasion (along with income tax being done away with). The indirect tax structure and collection mechanism needs to improve significantly;
Improve the dividends & profitability of central govt undertakings to get better Receipts. This is an area needing attention.
As a nation we need to understand that higher national or individual debt is not the answer. The answer for India is significantly improved indirect tax collection and better central & state government public sector units management.
It would be a truism to say that India needs a new Tax Code for it's future needs. The existing Direct and Indirect tax laws will not serve the purpose.
We cannot allow old maxims of direct tax is progressive tax (in fact in India it is very regressive), that public sector is family jewels (those jewels must give proper returns and increase India industry growth) and take a relook our tax methodology.
The tax employees who are today part of the direct tax administration move to indirect tax administration. Clearly, giving scope for better indirect tax administration and enforcement. The individual is no longer connected with the tax department, only businesses would be connected.
One big advantage of doing away with direct tax would be the deletion of the concept of income escaping income tax and becoming black money. When income is conceptually not taxed but consumption is taxed, black money as a concept dies for individuals. It remains for business where direct and indirect tax remain. That can be better supervised.
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Views expressed above are the author's own.