Budget 2022-23: According to some newsreports, Every stimulus package to boost the economy has its own burdening impact on the country’s fiscal position. A stimulus through tax reforms, on the other hand, will be more effective in establishing economic resilience in a long-term manner. In the run-up to formalising the annual budget for 2022-23, Finance Minister Nirmala Sitharaman is seeking input from stakeholders. It is past high time to take a risk on a fresh concept to personal income taxation. Direct tax reform in the form of an expenditure tax, which would be a more rational substitute for the income tax, could be used to provide stimulus.
About 6.32 crore people will be relieved of the burden of filing annual income tax returns if personal income tax is abolished (ITR). Because new entrepreneurs and emerging start-ups are not exempt from personal tax compliance, the ITR has a demoralising effect on their ability to grow. People are required by income tax regulations to keep and submit various records as well as file returns. Millions of returns are scrutinised by the Income Tax Department, which is followed by queries, clarifications, refunds, and lengthy correspondence. The legal battles drag on for years, costing both citizens and the government money. If personal income tax is abolished, the various organisations that comply with TDS will be relieved of the burden of collecting, remitting, and submitting various returns.
The United Arab Emirates, Qatar, Oman, Kuwait, the Cayman Islands, Bahrain, Bermuda, Saudi Arabia, and Brunei Darussalam are among the countries where you do not have to pay income tax. Citizens in these countries, on the other hand, are required to contribute to social security. Although some of these countries are well-known tax havens, the vast majority have found ways to fund government spending through natural resources.
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The income tax is primarily paid by middle-class salaried workers. For the wealthy, dividends and capital gains, rather than salaries, are a major source of income. According to data from the Income Tax Department, only 8,600 people have declared an annual income of more than Rs 5 crore.
Furthermore, in an economy with a tax-paying base of around 1.5 crore people, four lakh people with incomes exceeding Rs 20 lakh account for 63 percent of the income taxes collected from individuals, accounting for 1% of the tax base. As a result, 99 percent of India’s tax-paying citizens are forced to file ITRs while paying a pittance in tax on some excuse or another. People that pay up are generally from the salaried class, as they can’t avoid paying taxes because TDS is deducted.
Only salaried individuals are required to pay personal income tax. All other groups manage to elude detection by employing a variety of strategies. The salaried class pays income tax and then spends the net income, whereas the non-salaried classes spend money on various things to lower their tax liability. Rentals, phone, power, domestic and international travel, water, and entertainment expenses are all tax-deductible under the business and professional category.
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Only 2,200 doctors, chartered accountants, lawyers, and other professionals have declared annual earnings of more over Rs 1 crore. Agriculturists who make a lot of money don’t have to pay much in taxes. Even political parties make sure they don’t have to pay taxes. Only 1.46 crore people, or less than 1% of the population, are required to pay income tax, according to Prime Minister Narendra Modi during a summit in February 2020.
In the fiscal year 2020-21, income tax was planned at Rs 6,38,000 crore, or 26.30 percent of total revenue receipts, out of gross tax revenue of Rs 24,23,020 crore. Rs 6,81,000 crore (28%) in corporate tax, Rs 6,90,500 crore (28.5%) in GST, Rs 2,67,000 crore (11%) in excise charges, Rs 1,38,000 crore (5.70%) in customs, and Rs 1,020 crore in service tax (0.045 percent ).
People have a general tendency to avoid paying taxes. Tax planning, often known as tax avoidance, is a legal way to lower one’s tax bill. Evasion, on the other hand, is a crime. There is a parallel black money system that is bounded by real estate and gold. If personal income tax is replaced by an expenditure tax, there will be no opportunity for actual income to be converted into black money through tax evasion, and all revenues will be available for productive economic reasons.
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Banks typically keep 3% of deposits in cash reserve ratios (CRRs) and lend 97% of the time, including the Statutory Liquidity Ratio (SLR) requirement. This is due to the fact that 97 percent will be returned to the banking system as deposits, with 3 percent retained for lending, and the cycle will continue. This is the method by which banks create credit. If any black money is brought to the bank as a lawful deposit, the money supply and thus productivity will be greatly increased. Bank lending capacity will be greatly increased as a result of this.
The expenditure tax is similar to the income tax, with the exception that the tax base is one’s expenditure rather than one’s income. Rates of spending tax can be made highly progressive in order to substantially tax the wealthy. Even so, one would be better off because much of the spending by the wealthy is done with capital, which is often exempt from income tax.
India could consider replacing income tax with an expenditure tax. The move from an income-based to an expenditure-based income tax will not only alleviate the negative effects and injustices of a non-inclusive income tax, but it will also curb wasteful consumption and stimulate savings to a much greater extent than the current system promises. Another substantial benefit will be the imposition of a portion of personal taxation on a family basis rather than putting high marginal costs on working spouses’ salaries. The expenditure tax will be a game-changing policy with enormous potential to boost the economy.
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