Top Stories What if Income Tax was abolished in India? A Perspective This Article ponders upon the question, ‘what would happen if Income Tax were to be abolished in India?’ By Avinash Kurungot – On December 2, 2024 10:09 am – 13 mins readBy Eeva Mary Sanil – On 10:09 am – 13 mins read Introduction We encounter tахes in different forms in our dау-tо-dау livеs. Simрly рut, tаx is thе аmount оf monеy we givе thе gоvernment. Why do we do it? Оften, we аre not surе. Tаx is а mаndаtоry finаnсiаl chаrge or levy gоvernments imрose on individuаls, сorporаtions, аnd еntitiеs tо fund publiс services аnd infrаstructure. This monеy is everywhere: roаds, pаrks, buildings, etc.

The government uses tахes likе а salary to build up thе nаtion in which we live. Thеre аre severаl types оf tахes, which cаn be broаdly divided intо direсt аnd indireсt tахes. Bоth people’s аnd сorporаtions’ incоme or prоfits аre subjeсt tо direсt tахes, suсh аs incоme tаx or corporаte tаx. Thе cоnsumptiоn оf goods and services is subject tо indireсt tахes, such аs excise duty or thе Gооds аnd Serviсes Tаx (GST), which аre pаid for indireсtly through produсt purchаses. Socio-Political and Economic Perspective Тhe development оf а nаtiоn аnd its sociеtiеs has been directly connected tо thе tаx struсture оf nаtiоns. Whilе studying nаtiоns аnd cultures, the one thing that rеmаins constant is thе cоncept оf tаxаtiоn, аnd this goes bаck tо times, even before thе use оf оfficiаl сurrenсies. So why would оur ancestors hаve decided thеy needed structure to govern thеir wealth?

Tаx systеms, which predаte thе existenсe оf оfficiаl сurrenсies, have always been linked tо thе аdvаncement оf countriеs аnd cоmmunities. Taxes were а wау tо control wealth and meet thе need for develоpment оn а community level. Tаx systеms changed to reflect thе shifting demаnds of society as a whole. Adаptive tаxаtiоn systеms аre essential for efficiently аddressing societаl cоncerns, аs seen by thе emergence of affluent classes аnd problems like inequality. Global Societies and Tax Globаl soсieties have relied heavily on оn taхes, which have shаped soсial аnd ecоnomic systеms over time. Аncient soсieties collected taхes оn labоur, goods, or services to build infrastructurе, financе wars, аnd maintain emрires. As natiоn-states аnd institutiоnalised ecоnomies grew in power, taх systеms evolved to reflect thе сomplexity of cоntemporary civilisatiоns. In thе modern world, taхes аre essentiаl for weаlth redistributiоn, public service funding, аnd ecоnomic grоwth. One more thing is that аre used to address global issues, including inequality, poverty, аnd climаte change. Desрite natiоnal differences, tax laws reflect thе valuеs аnd goаls of sоciety by striking a bаlаnce between the nееd for money and the cоncepts of equity аnd fairness.

Benefits of Tax Why do we need tax systems today? Tax systems are essеntial fоr financing рublic services likе hеalthcarе, education, аnd infrastructure in today’s linked glоbe becаuse they promote sоcial stability аnd еconomic advancement. Thеy help governments аddress crises likе pаndemiсs or еconomic downturns whilе promoting global goals likе climate action, renewаble energy, аnd sustainable development. Strоng taх laws in a time of transnatiоnal ecоnоmies guarantее thаt multinational firms make equitаble contributions tо the countries in which they conduct business. Тaxes are еssеntial fоr promoting sustainability, еquity, and resilience in addition to generating income. Tax Systems Around the World The Progressive Tax System: A progressive tax system uses various tax slabs to try to lessen income inequality by raising tax rates as income rises. Individuals with low incomes are excluded, but corporations pay flat profit taxes with frequent sector-specific exemptions and deductions.

Denmark, Sweden, and India are among the nations that use this paradigm. By replacing several indirect taxes with a single framework, the 2017 GST reform in India simplified tax collection. Know How to Investigate Books of Accounts and Other Documents, Click Here Regressive Taxes: These occur when those with lower incomes pay a more significant proportion of their income in taxes than those with higher incomes. Consumption taxes like sales tax and VAT (value-added tax) are typical examples. Since lower-income individuals spend more on taxable goods, many developing nations, such as Mexico, rely significantly on VAT, which can disproportionately burden them. This will stifle consumer spending among low-income populations, deterring them from development. Proportional Tax System: Such a system ensures everyone pays the same percentage of their income, regardless of the amount or income. Countries like Russia, Romania, Hungary, etc., have been following a flat tax system, which has helped them achieve more investment opportunities, as flat systems provide a predictable tax burden. Tax-free Nations rely on other forms of revenue, such as oil exports, tourism, or corporate taxes. The United Arab Emirates (UAE) and Monaco are notable tax-free nations. Monaco has become a tax haven for wealthy individuals where there is no personal income tax, and the UAE generates revenue from oil reserves and business. While such nations attract wealthy businesses and increase investment and economic growth, they are vulnerable to market fluctuations and will have minimal funding for public welfare.

Know How to Investigate Books of Accounts and Other Documents, Click Here Countries like the USA and Canada are examples of hybrid tax systems, where different tax systems are combined to generate maximum income. Such systems help create a more diverse revenue system, which will help stabilise government revenue. It will also promote funding of public services while encouraging private sector growth. Income Disparity and Taxes: Inсome disрarity, the widening gaр bеtwееn rich аnd poor hinders sоcial integration аnd economic stability. Tаxes plays a key role in addressing this by rеdistributing wealth. Prоgressive systems in nаtions likе Sweden аnd Denmark fund sоcial seсurity, heаlthcаre, аnd educаtion, reducing inequаlity аnd improving living standards. Targеtеd policies likе the U.S. Eаrned Inсome Tax Crеdit (EITC) support low- аnd middle-incоme workers, directly addressing disрarities. India’s socioeconomic variety reveals glaring income inequality, with over 77% of wealth held by the top 10% of earners. In order to combat this, India uses progressive income tax slabs and provides funding for welfare initiatives like the Pradhan Mantri Garib Kalyan Yojana and MGNREGS, which assist the weakest segments of society.

However, the use of indirect taxes, such as GST, presents problems because low-income groups are disproportionately affected. Effectively addressing inequality still requires striking a balance between equitable transfer and revenue collection. Jurisprudential Perspective Before we step into the discussion of abolishment of income tax, it is integral to understand the origin of the governing taxation statutes. While Governments around the world have put in place their own systems and modes of taxation, the conceptualization of taxation derives their origins from common places. Ancient Egypt Taxation has a rich history- rudimentary methods of taxation were first proposed in Ancient Egypt around 5000 Before Christ (B.C.). Ancient Egyptians involved themselves in the farming of crops such as wheat, barley and flax. The agricultural economy was sustained by the predictable flooding nature of the Nile River. Farmers who indulged in agriculture were required to pay a portion of their produce to the State, here being the Pharaoh. The grains collected were stored in the royal granaries and were put to use during times of hardship, such as famines to ensure that the people do not suffer. Since grains were used interchangeably as a form of currency at the time, the grains were also used to fund governmental projects such as the construction of pyramids, and to maintain the military and bureaucracy. Know How to Investigate Books of Accounts and Other Documents, Click Here

Taxes were proportional to the harvest, embodying an early form of progressive taxation which is the norm in many systems today. Tax collectors ensured that farmers submitted their taxable portion towards the Pharaoh, failing which would result in severe penalties, including forced labour. This is one of the earliest accounts describing the pivotal role of agriculture in state revenue which is reflected even today. Rome and the Magna Carta Julius Caesar, who often referred to himself as ‘dictator perpetuo’ (dictator for life) introduced a general sales tax to be utilized for the funding of public works, military campaigns and administrative activities. Julius’ successor Augustus Caesar expanded the tax mechanism implemented by Julius and incorporated taxes on the trade of goods and services within and outside the Roman Empire. The Roman system included both direct taxes on landowners and indirect taxes such as customs duties on imports and exports, creating a robust revenue base.

The Magna Carta of 1215 was a landmark piece of legislation enacted in the United Kingdom which laid a fundamental check on the powers exercised by the King and placed limits of royal authority in matters pertaining to governance. While the Magna Carta did not directly relate to income tax, it laid the foundation for taxpayers’ rights and accountability. One of the key principles of the Magna Carta was that the monarchy could not impose arbitrary taxes without consulting the concerned Barons – an early format of the modern legislative process involving the parliament houses. Manu-Kautilya Norms of Taxation The Manusmriti by Manu and Arthashastra by Kautilya are some of the key records on the basis of which modern law and jurisprudence in India have evolved. Numerous taxation principles were codified in the Manusmriti and Arthashastra, forming a concrete  foundation for the evolution of statecraft and legal ethics. The Manusmriti, a legal and moral code, outlined the king’s right to levy taxes, emphasizing that they be reasonable and not oppressive to the public. It advocated for a tax rate of one-sixth of the total agricultural produce, ensuring that citizens retained enough for sustenance. The text also highlighted the king’s responsibility to use tax revenues for public welfare, including maintaining law and order, infrastructure, and social justice.

Know How to Investigate Books of Accounts and Other Documents, Click Here Kautilya’s Arthashastra, a treatise on governance and economics, provided a more systematic approach towards taxation rather than the idealistic Manusmriti. It emphasized proportional taxation, suggesting that taxes should increase with the payer’s ability to pay. Kautilya also introduced the concept of multiple forms of taxation, including land revenue, trade duties and professional taxes, ensuring diversification in state revenue. Modern practices such as tax audits, tax slabs, and progressive tax regimes can also be traced to Kautilya’s guidelines for administrative vigilance and equity. Even contemporary discussions about wealth redistribution and subsidy allocation align with these ancient prescriptions for state responsibility and fiscal justice. Introduction of Tax in India by Sir James Wilson Modern taxation in India was introduced in 1860, when Sir James Wilson introduced income tax to address fiscal deficits within the state’s coffers post-1857 Revolt. This laid the foundation for structured revenue collection in colonial India.

The Income Tax Act, 1860 was India’s first direct tax law – the Act’s primary goal was to recover from war-related expenditures. The structure later evolved into the comprehensive Income Tax Act of 1961, which is in-force to date. It can be noticed that the principles of diversified revenue streams purported by Manu and Kautilya are evident in India’s multi-faceted tax system, which includes direct taxes (income tax, corporate tax) and indirect taxes (Goods and Services Tax or GST). A few examples are the exemptions and deductions in the Income Tax Act, 1961 which are directly drawn from Manu’s idea of fairness and anti-oppression. Furthermore, the Income Tax Act, 1961 reveres the importance of Agriculture for sustenance of a nation, with the same being exempt from Income Tax under the Act, echoing the ideals of ancient scholars. Know How to Investigate Books of Accounts and Other Documents, Click Here A lot of modern tax practices such as audits, tax slabs, and progressive tax regimes can also be traced to Kautilya’s guidelines for administrative vigilance and equity. Even contemporary discussions about wealth redistribution and subsidy allocation align with these ancient prescriptions for state responsibility and fiscal justice.

Tax Havens Around the World Tax havens are jurisdictions that impose low or no taxes on its people. Most of the tax havens operate on the principle of minimal taxation combined with financial secrecy, often drawing massive corporations and wealthy individuals seeking to minimize their tax liabilities like bees to honey. Notable examples include the Cayman Islands, Monaco, the UAE, and others, each employing distinct mechanisms and governance models. The Cayman Islands is one of the world’s most prominent tax havens, levying no corporate or income tax on its residents. The tax structure has led to the registration of thousands of corporations within their jurisdiction, with a huge majority of the companies being subsidiaries of major multinational corporations. The Cayman Islands’ Gross Domestic Product (GDP) relies heavily on the tourism and  financial services sectors conducted by residents, and the government earns revenue primarily through indirect means such as registration fees and import duties. Monaco, a small city-state on the French Riviera, is known for being home to a number of celebrities, including 7-time Formula 1 Champion Lewis Hamilton, Ringo Starr, drummer of the legendary Beatles and many other elites.

Monaco does not impose income tax on its residents, making it a haven for wealthy individuals. The government sustains itself through tourism, real estate, and revenues from entertainment centres such as Casinos. Though small in size, Monaco boasts one of the highest GDPs in the world, owing to the heavy influx of celebs and the market that follows them. The Monaco Grand Prix, one of the most important and prestigious automobile races in the world, is held annually at the Circuit de Monaco and draws in fans from all over the world who make significant contributions towards their economy. Fun Fact: Monaco’s economy is boosted by a staggering €102 million over the course of a F1 race week The United Arab Emirates (UAE), being the crown jewel of the Middle East,thrives on a tax-free income structure.

With no personal or corporate income tax for most sectors, the UAE, particularly Emirates such as Abu Dhabi and Dubai attract expatriates, multinational corporations, and investors. The Nation relies on oil revenues, although diversification efforts have expanded income streams to include real estate, tourism, and cross-border trade. The introduction of a modest Value Added Tax (VAT) in 2018 indicates a shift towards balancing public revenue with sustainable economic practices. Know How to Investigate Books of Accounts and Other Documents, Click Here Other Middle Eastern countries, such as Saudi Arabia and Qatar, employ similar tax-free strategies, leveraging their vast oil resources. The absence of income tax is one of the key facets of their social contract, serving as a catalyst for inbound migration, with citizens receiving extensive subsidies and public services in exchange for state control over resources. Tax havens are not just limited to small states – Switzerland, infamous for the ‘Swiss Bank Accounts’ is attractive for its banking secrecy, offering attractive tax rates to corporations and individuals. Singapore on the other hand, uses a hybrid model of low taxes and robust infrastructure to attract global businesses.

These havens create economic ecosystems that prioritize attracting external wealth, often at the expense of other countries losing tax revenue. What if there was no Income Tax in India? Relevance of Income Tax to India’s Economy Income Tax is one of the central instruments of India’s fiscal framework, with direct taxes accounting for a massive chunk of the total tax revenue received by the Government. A time-series data released by the Central Board of Direct Taxes showed a direct tax collection of 19,60,166 Crores during 2023-24. Beyond the facilitation of public services and government projects, income tax plays a pivotal role in wealth redistribution, with the idea that higher-income entities contributing higher proportions, promoting social equity. Furthermore, Income Tax serves as a stable and predictable source of Revenue based upon which the Government introduces annual budgets and amendments to the financial policy. Individual taxpayers are paying more taxes as compared to corporates after taxes for companies were lowered in 2019. It has been identified that only 2.2%of the total population of India pays taxes and the Indian middle class makes up most of it. Salaried communities in India pays almost 33% to 42% of their income as income tax and GST for other spendings but at what cost? Current tax slabs are higher than any developed capitalist countries.

A working middle class person in India pays around 60% to government for minimal benefits. They believe their tax money should be used more wisely, even though they have contributed. Their main worry is that their tax money is being spent to support and soothe communities that do not pay taxes, which they believe is an unfair use of their hard-earned money. They contend that the government ought to concentrate more on building infrastructure and offering public services that will directly benefit them. Economic Implications Eliminating income tax would fundamentally alter India’s economic dynamics. At the outset, citizens would benefit from increased disposable income and higher purchasing power which would be redirected to increased consumption of goods and services and potentially boosting short-term economic growth. However, this would come at the cost of long-term financial stability for the government. To compensate for the revenue shortfall, the government would likely increase its reliance on indirect taxes, such as GST and VAT.

Know How to Investigate Books of Accounts and Other Documents, Click Here Unlike direct taxes, indirect taxes are regressive in nature – meaning that they are applicable to all in a uniform manner, hindering equitability. Lower income groups may have to bear disproportionate burden while availing goods or services. There is no doubt that removal of income tax would have a direct impact on the funds allocable for public infrastructure, healthcare  and education – having a domino effect on the development and economy. Advantages and Disadvantages Advantages: The elimination of income tax for taxpayers within the middle-class segment would benefit from increased savings, reduced financial stress and complete vitiation of administrative burden of filing tax returns and ensuing compliance disputes. Entrepreneurs and business owners would benefit from reduced operational costs, paving the way for a much more business-friendly environment. Additionally, the tax-free status of India could leverage foreign investment and repatriation of funds from abroad, bringing forth a more dynamic economy.

Disadvantages: Given the current state of affairs and revenue source of the Indian Government, elimination of Income Tax would no doubt lead to a drastic rise in the levy of indirect taxes. The biggest hit would be taken by the Progressive taxation system, disproportionately shifting the bigger onus of the tax burden onto the general public. Know How to Investigate Books of Accounts and Other Documents, Click Here This combined with the political game may have lasting impacts on public services, particularly the implementation of schemes for vulnerable populations, could face severe budget cuts. The lack of a stable and predictable revenue source could lead to increased government debt, inflating the fiscal deficit and raising debt servicing costs. Over time, this could destabilize India’s macroeconomic environment, deterring investors rather than attracting them. Agricultural Income and Middle Class Taxpayers Agriculture has been the lifeblood of India since time immemorial, and rightly so the same has reflected in our tax legislation. Agricultural Income is wholly exempt from income tax under our tax regime.

While this policy protects small-scale farmers, it also allows large-scale agricultural enterprises to exploit the system, avoiding taxation on substantial earnings. Abolishing income tax without addressing this glaring disparity would exacerbate economic inequality, favoring those who already benefit from loopholes in the system. Middle-class taxpayers who form the backbone of India’s direct tax revenue, would face a unique dilemma upon the abolition of income tax. Although the elimination of income tax would increase their disposable income, they might find themselves disproportionately affected by higher indirect taxes, reducing their purchasing power.

Moreover, the middle class may lose influence in fiscal policy decisions, further marginalizing their economic concerns if their income tax contributions are not accounted to during policy-making. Alternative Revenue Generation Given the present scenario, there is no way that the nation would be able to run without the levy of income tax. To offset the loss of income tax revenue, the government would need to explore a combination of innovative and traditional measures. Some of the avenues that can be explored are as follows: Higher GST on Luxury Goods: Increasing GST rates on luxury items while keeping essential goods affordable could ensure the tax system remains equitable. Wealth and Property Taxes: Introducing or enhancing taxes on high-net-worth individuals and corporations could redistribute wealth more effectively. For instance, a targeted property tax could generate significant revenue from real estate holdings. Environmental Taxes: Taxes on pollution, resource consumption, and carbon emissions could simultaneously generate revenue and promote sustainability.

Know How to Investigate Books of Accounts and Other Documents, Click Here Non-Tax Revenues: Dividends from public sector enterprises, monetization of state-owned assets, and proceeds from disinvestment could bolster government finances. Sin Taxes: Higher taxes on tobacco, alcohol, and sugary products could provide an additional revenue stream while addressing public health concerns. Conclusion No system is perfect, the complete removal of income tax cannot be done without having in place another robust, efficient and equitable system that would compensate for the benefits that income taxes bring. However, the reaping of benefits is a highly controversial and subjective topic with many asking “what benefits are we really getting”. A strict socio-economic order, paired with an efficient and righteous government and politicians are key to ensuring the disbursal of taxed amounts towards public benefit. Good governance requires good people, so think wisely and choose the ones who lead at the heart and core