Income Tax Reforms for Individual Tax Payers

The income taxes in India are too complex for the common people and mostly they are manipulative in the sense that it tries to control people’s behavior by rewarding them through tax rebates if they engage in certain behavior desired by government. The desired behavior could vary arbitrarily like rebates for investing in infrastructure bonds, shares, FDs etc. The complexity of it with several provisions, sections etc. makes people often make mistakes and take help of charted accounts just for filling income tax. It also increases cost for government in assessment, litigation etc. along with increasing corruption.  Overall, there is a need to make tax filling simple and provide a sense of economic freedom to people.

Allowances & Exemptions

The several allowances and exemptions given by government indicates excessive interference of government in people’s life by micro-managing people’s expenditure. Like, HRA indicates as if the government is telling you to follow their guidelines on how much you should spend on housing otherwise you’d be fined through extra taxes. Similar is the case with LTA where government tells when to take holiday and similarly on how much to spend on conveyance etc.

Rebates

Like corporate get rebate on their expenses and are only taxed on their profit similarly people should also be assessed similarly. But the difference is that in case of individuals, the main expenses are incurred beforehand like on skill development through many years. There are also other expenses like rent, travel etc. which government tries to adjust through allowances. Instead of calculating how much to rebate like in HRA etc., the government should simply lower the taxes, which would automatically take care of expenses incurred and would also reduce complexity, corruption etc.

Purpose of Tax

Citizens and the government should consider the tax as the duty of citizens where they pay primarily for providing security both from inside and outside and maintaining law and order and providing justice etc. and secondarily for amenities and services common to all citizens like roads, lightning, parks etc. and tertiarily for well-being of the society in the form of providing for health and education etc. The government should mainly focus on fulfilling primary and secondary needs and for tertiary needs, it should try to improve them through better policies rather than itself getting into them as most of the time, these things are ought to be done by society itself through charitable institutions. There is a line between governance and social service and government often finds itself on the other side as it gets them votes. Forcing people to pay for robin hood style schemes like distributing cycles, TVs etc. which could fetch politician votes may be welcomed by the beneficiaries but doesn’t sound ethical thing to do. Many times, social objectives could be achieved by making better policies instead of spending money like quota for poor students in schools, so that trusts could decide if they want to open school while on the other hand poor students would receive high quality education and without increasing any taxes.

High and Unjust Tax

It is mentioned in the texts that when the ruler tries to collect high and unjust tax from its subjects then the society tends to become hypocrite. The imposition of 97.5% income tax in the highest bracket during 1973 shows that how that step led to corruption, tax evasion and brain drain etc. So, the taxes should always be fair and that also increases compliance.

It is also important to establish people’s belief that tax is just and evading it is immoral and that could only be done if the taxes are just and tax expenditure is fare. The sense of injustice in people regarding tax payment make people feel tax obligation as a joke and something to evade. And generally, when it becomes the prevalent view in the society that taxes are unjust then it becomes extremely difficult to check the evasion of it as almost everyone starts evading taxes and people start sympathizing the people who are caught for tax evasion and that leads to direct confrontation of government with people.

Flat tax

Since tax is not some kind of extortion like Hafta, but something which the society volunteers to pool their money for the benefits of all, so the taxes should be just and should not be collected in Robin Hood fashion and expenditure of it should be for benefit for all rather than a segment of society especially if some other segment pay for it. There should a flat tax rate like 16% (as mentioned in texts which advises people to pay one sixth income as tax) for all individuals with standard deduction of around 2.4L. The flat rate is a great equalizer which treats everyone equally and it signifies that everyone is contributing in equal capacity and the rich is paying more and the poor is paying less like the one who would be earning less would be contributing in hundreds while the rich would be contributing in lacs.

The standard deduction should be kept low like if someone is earning 3L per annum then considering 2.4L standard deduction and 16% as tax rate, still that person just needs to pay the tax amount of Rs. 800 per month which I believe is fare for a person earning 25k per month and for the services a person gets for being a citizen. Also, it is always good to include maximum number of people under tax with lower standard deduction as that makes people to fix accountability on the government on how their money is spent and whether government is fulfilling its duties and obligations.

Indirect Tax

People have less issues with indirect taxes since people just consider it as part of the price of the goods or services they purchase, so it doesn’t pinch much. Also, Arth-shastra mentions that the King should collect the tax from its subjects like the bees extract nectar from flowers without giving them any discomfort and indirect taxes in a way fulfills that objective. That would also give government incentive to improve trade as more consumption would automatically fetch more taxes. Indirect taxes should become the primary source of tax generation for government as it is win-win situation both for people and the government.

Simplified Tax

The filling of taxes should be extremely simple in a single page form where a person just mentions all the assets and income from different sources like employment, financial instruments, rents, gifts, lotteries etc. and pay the taxes accordingly. It should be simple enough so that less educated people should also find it intuitive. There is a need to have an understanding in the government that income tax is something to be filed by common people themselves who couldn’t hire a team of chartered accountants and lawyers like corporate.

Conclusion

The government should strive towards providing fundamental rights to its citizen where it is clearly stated that government must ensure social, economic and political justice. By dictating the citizens on how to spend their money seems doesn’t appear like economic justice.

I believe that by not controlling people’s behavior through several exemptions etc. gives the sense of economic freedom to the people where people feel free to do what they think is best for them. If government is anyway wanted to promote certain schemes like Health insurances, NPS etc. then it could do so through lowering indirect taxes or by offering higher interest rates on them but without tempering the simple template of personal income tax. Further, with reduced taxes, people would be left with more money to spend which would also give boost to the economy.