Budget 2020: To Tax or Not To Tax !!
With Budget 2020 inching closer day by day, let’s look at how Finance Minister Nirmala Sitharaman and PM Narendra Modi could revive a slowing economy.
Hey there! We know that national anxiety is at all-time high just as the Union Budget is to be declared on 1st Feb (it’s like the night before Whitewalkers invaded Westeros). But we know that amid the economic slowdown, we all can expect some sort of relief from the government. Now, there have been multiple speculations on how and what reliefs could be provided.
There is an ongoing debate between the Liberals and the Conservatives.
- Traditionally liberals believe in Big Governments, higher taxes for wealthy & welfare for poor.
- Whereas Conservatives believe in Smaller Governments, Lower taxes, individual responsibilities,and free markets.
Your views on taxes might depend on which political ideology you believe in. Let’s have a look at different schools of thought…
Abolishment of Income Tax
Abolishing Income Tax might seem insane at first but hear us out. There has been a lot of talk surrounding this thought. Let’s face it, we are smart… We won’t pay our taxes unless and until we are made to.
So if there is no Income Tax, how will the government get its revenue?
One option could be taxing our transactions — Banking and digital. In the calendar year 2019, the total amount of UPI transactions amounted to INR 109,932.4 crores. That’s just UPI. Let’s not forget that there are tons of other digital payment methods like Mobile Wallets, Bank pre-paid cards, Point of Sale (PoS), Internet Banking, Mobile Banking, Bharat Interface for Money (BHIM) app and Aadhaar Enabled Payment System (AEPS).
The other course of action could be the BCTT (Banking Cash Transaction Tax). BCTT featured in 2005 as a revolutionary tool to identify traders that dodge paying Income tax.
The Government could get creative and re-introduce BCTT along with Digital transaction tax to replace Income Tax.
Senior BJP MP Subramanian Swamy has been a long-time advocate of the abolishment of Income Tax. Swamy asks
“So, who is paying (Income Tax) in India? a very small fraction. So, why should you impose this burden on this small fraction”
According to the senior politician & economist, abolishing Income tax would lower the burden from the working class and boost the entrepreneurial spirit.
Of course, any action would have its pros and cons. We talked about the pros, let us quickly understand the cons. Well, it will become extremely difficult to predict the total number of transactions, ergo making it difficult for the Government to plan ahead. With PM Modi rallying people to open a bank account through initiatives like Pradhan Mantri Jan Dhan Yojana (PMJDY). Would enforcing taxes on the bank and digital transactions defy the purpose of such schemes?
Mobile phone and internet usage is steadily increasing in India. Add the growing popularity of digital transactions given that the Modi government is taking mammoth steps to digitalize India, the idea of abolishing the traditional Income tax and introducing digital tax isn’t far fetched after all.
Learn more about Income tax
The good old debate between Flat Tax and Progressive Tax is raging for decades now. Both have their share of fans and critics. It is important to understand that one just simply can’t differentiate these systems by ‘fair’ or ‘unfair’. It all depends on who this system benefits more.
- The progressive tax rate is most popular among countries because citizens are taxed as per their income. Meaning the more you earn, higher the tax you pay.
- The flat rate has one unified tax rate for all. Meaning that irrespective of your disposable income, you are subject to the same tax rate as anybody else.
There are multiple sides to this conundrum. One of the arguments against the progressive tax system is that individuals would be demotivated to earn more. As they would be working harder just to have a fractional increase in their incomes.
While in a flat tax system the constant tax rate is believed to encourage the poor to earn more. However, this system also risks protest from the bottom echelon as it will increase their tax burden.
Taking into account that India’s top 1% pay one-third of total taxes and the top 5% pay nearly two-thirds of total taxes, a flat rate seems less likely. We’ll have to wait and see for ourselves.
Then again, it all depends on which side of the Liberal vs Conservative debate you fall.
Change in existing Slabs
Let’s face it! The existing slabs in India seem dated with today’s reality as the tax burden isn’t shared equally by everyone. We could witness a change in the existing slab rates in the upcoming Budget. And why not? Historically, slab rates have changed every couple of years. These changes have always been in line with the economic situation. Considering that the incumbent slab rates have been implemented since 2017–18 and the economy slowing down dangerously, we might be introduced to fresh Tax Slabs.
Could we see new tax slabs?
Well, the wait for answers isn’t too long. We all will witness what course of action Finance Minister Nirmala Sitharaman will undertake for the economy on the 1st of February.
Stay tuned to Quicko’s Medium Blog for updates. Until then, Farewell.