Wednesday 25 May 2022
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Replace I-T With Consumption Tax

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[dropcap]O[/dropcap]ne of the several promises the BJP had made to woo the middle class to vote for it in the 2014 Lok Sabha elections was abolition of Income Tax. While its government hardly reduced this tax in the two annual Budgets it has presented so far, today’s newspapers reveal that a mere 18,359 Indians declared in the last financial year that their income was above Rs 1 crore that year and paid the tax due on it. This number is lower than the number of luxury cars of brands Mercedes, Audi, BMW, Jaguar-Land Rover etc sold every year in this country. This is also less than the number of super-luxury houses bought every year in this country in the price range of Rs 10 crore – Rs 100 crore. Clearly, a whole lot of people are hiding their real income.

The transaction tax that was proposed as a substitute for I-T has its own share of issues. On the one hand, Baba Ramdev, who had campaigned for a Modi government, had advocated this tax proposed by an NGO called Arth Kranti. On the other, Subramanian Swamy had said that this was only one of many proposals that had reached the BJP as alternatives to I-T, and that the party had not decided in its favour. But he did add that I-T must go, whatever be its replacement. He had said this before the election.

Our point is simple. Why have a tax that the poor are exempted from rightly but the evade easily and wrongly while those who get salaries for their work find no way to escape the TDS (tax deductible at source)? Why have a rule that punishes only one class that has no option but to conform to the rule? Why not move to consumption tax? While it is difficult to determine how much one earns, how rich (or poor) one is can easily be detected from his expenditure. Only he who has an income can spend. Therefore, the government can increase the consumption taxes in a manner that would be adequate to compensate for the loss in revenue caused by abolition of I-T. Since every invoiced commodity you buy from the market comes with a tax component, no Indian buyer can escape it. There may be some items for which vendors do not issue bills, but no consumer can live just on those few goods; one has to buy products whose tax components are inescapable. Thus, we move from an unjust extortion of the middle class to a just system where everybody contributes to building such structures that the private sector is not quite interested in — schooling and in remote areas, for example — a gap that government must fill using our money. At the same time, to relieve the poor, while the tax rates on essential goods can be made negligible, those on luxury items can be made exorbitant. Say, a pack of table may attract a consumption tax of 0.5% while a customised Rolls Royce car is levied with a consumption tax of 50%.

Will this lead to smuggling of items deemed luxurious by the state? Well, smuggling is driven by the natural consumer instinct of looking for the cheapest goods out of all options available in the market — both legal and grey. Depending on how likely it is for a commodity to be smuggled on a large scale, the government can levy a reasonable consumption tax on it. “Reasonable” may be read as “affordable”both for the seller and the buyer. If the tax to be paid on the item is less than the cost (hassle and risk) of smuggling it, it will not be smuggled.

We are not against the rich. People will be richer or poorer based on their merits and other enabling factors in every society. If a citizen climbs up the income ladder without breaking the law, must welcome his ascension. However, that citizen must pay a share to the environment that enabled him to turn richer — which the state can take from him through a fair tax regime. Remember that one of the ways to turn is to have some money to spare. Savings is another way of looking at what is called purchasing power. Middle class’s ability to save or purchase is being curbed by this wrong system called Income Tax. It is not allowing this class to have a capital that he can invest wisely or with which he can launch a business to rise financially. If the government cannot scrap I-T in one go, it must phase it out by successively reducing it while increasing the consumption taxes proportionately in every annual Budget.

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