One of the major policy initiatives that is being debated by BJP if elected to power in 2014 is the “Abolition of Personal Income Tax”. This would be a revolutionary step that can make significant difference to the economy of the country.
The total IT collections of the Government includes “Personal Income Tax”, “Income from Business” and “Corporate Income Tax”. There are sub categories such as Tax on investment earnings, service tax etc.
This article in First Post makes a detailed case for supporting this idea proposed by BJP and is worth a serious reading.
There is no doubt that the decision if fully endorsed by the BJP manifesto will be a popular move. However, Congress is likely to make it difficult for the next Government to take such decisions by emptying the Government resources before the elections and challenging any move that affects the inflow of income to the Government.
Presently the total revenue earning of the order of Rs 2,50,000 crores. Hence if the Government has to give up this huge revenue source which is around 20% of the total revenue, then the Government needs to think about how it would replace this revenue loss with
a) Additional revenue from indirect taxes
b)Additional revenue from corporate tax
c)Savings in expenditure
The abolition of non corporate personal income tax (including tax on firms and business income of professionals) will provide a huge boost to the sentiments in the market and provide an incentive for professionals and self employed to earn more without resorting to dishonest methods of hiding income or inflating expenditure. The release of human resources which are unproductively employed in such operations should provide a push to growth in the economy though it is difficult to quantify such benefits.
It can however be expected that there would be a greater demand for manufactured products leading to a higher collection of indirect taxes. Probably a little hike in indirect taxes can be considered.
In order to encourage flow of savings into productive purpose, a tax on ” Liquidation in Investments” in the form of “Expenditure Tax”, “Continuation of tax on investment trading etc” can be considered.
Any amount left by public which is left in the Banking system is likely to benefit the economy in general particularly if the Government also initiates some additional banking policy changes that will drive more funding for the “Manufacturing Sector” of the economy.
One such option is to incentivize the banks on their long term funding of manufacturing sector for expansion and modernization. The incentivization could be in such form where the profitability of the Banks increase without any specific Interest subsidy from the Government. For example, the Government may consider linking its capital infusion into public sector banks to the index of growth in Bank’s lending to manufacturing sector.
It is good that BJP is considering some innovative financial sector reforms while other parties like AAP are falling back on “Popular Subsidies”.