A taxing thought

Subramaniam Swamy has been a strong advocate for abolishing income tax. There is a basic dichotomy in the taxation structure in India — many corporates pay taxes that are a fraction of what they should be paying while the salaried class get deductions that can’t really be called deductions due to the impact of inflation.

Budget 2015 tinkered with a deduction that hasn’t been touched for a long time — the deduction for conveyance allowance was doubled to ₹1600 a month. However, this is what many would spend in Bengaluru, idling at traffic signals. Corporate and individual income taxes together are expected to contribute ₹6,98,686 crore to the exchequer according to the Revised Estimates for 2014-15. The abolition of income tax requires that an alternate source for revenue generation be found.

The history of income tax in India has been a consistent story of a revenue-seeking government and an exemption-seeking taxpayer. Some administrators of the tax law found a a via-media: the exchequer gets some but not all revenue and the taxpayer gets some but not the complete deduction.

Both parties have got used to this system and many have perfected this as an art form. They would be the first opponents of a replacement to income tax. Another problem would be that lakhs of employees working for the tax department would be out of the only job they know. Finding suitable employment for them would be a challenge. Of course, chartered accountants too would also have to seek alternate avenues of practice.

The biggest threat , however, is that India would risk being termed a tax haven. The OECD is going hammer and tongs at big multinationals that use low tax zones as tax planning centres. This project, known as Base Erosion and Profit Sharing, attempts to prevent such tax planning. The UK has already drafted a Diverted Profits Tax that ensures some taxes remain in the country. Abolishing income tax could draw protests and pressure from India’strade and economic partners.

Advocates of income tax abolition recommend a tax on all banking transactions. One of the stellar successes in India has been the tax deducted at source. If banks are empowered to deduct tax at a nominal amount of all banking transactions, ₹6,98,686 crore can be surpassed without breaking into a sweat. However, this assumes that all transactions will be done through a bank.

The Jan Dhan Yojana Scheme has ensured that many have opened bank accounts. The government should encourage these account holders to operate these accounts regularly by conducting all their transactions through them. India had a Banking Cash Transaction Tax at 0.1 per cent which ran from 2005 till 2009. At its peak, the tax yielded around ₹550 crore per annum in revenue.

The abolition of income tax in India would need a change in the tax culture. The government should think of working on changing the culture.

A change can be evidenced when a taxpayer with multiple bank accounts discloses all the bank accounts to the tax authorities instead of cherry-picking which accounts to disclose. This is not a mean task.

The writer is a chartered accountant

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