India’s Transition to an Expenditure Tax: A Feasibility Study

The question whether India should switch from a direct income tax to an expenditure tax system is a complex and controversial topic. In this article, we will explore the feasibility of such a transition, considering economic, social, and practical implications. Additionally, we will review the views of experts, such as Swami Aniruddha, and analyze the comments made by Nicholas Kaldor on the Indian tax system.

Direct Income Tax: A Regressive System?

Swami Aniruddha argues that direct income tax (D.P.I.T), which is currently the primary method of taxation in India, is regressive and punitive. He contends that honest taxpayers face excessive harassment and that the burden of D.P.I.T, especially at lower levels of income, is disproportionately challenging. This regressive nature of the direct income tax system leads to a heavy tax burden on individuals seeking to fulfill their basic and evolving needs, which are crucial for economic stability and growth.

Proposed Tax Reforms

According to Swami Aniruddha, India should simplify its tax structure and reduce the tax burden on lower-income earners. Specifically, he suggests:

Eliminating direct personal income tax (D.P.I.T) for incomes up to 12 lakhs (approximately $15,000 USD) annually. Introducing a single rate of 16% for incomes above 12 lakhs but below 1 crore (approximately $130,000 USD), abolishing all deductions, exemptions, rebates, and reliefs. Allowing only agriculture income to be tax-exempt and taxing gifts, inheritance from close blood relatives, and PPF interest. Applying a 25% flat tax rate above 1 crore, without surcharges or cesses.

Additionally, he proposes reducing the Goods and Services Tax (GST) slabs to 4, with rates of 7%, 16%, and 25%. Grain and petroleum products would be brought under the GST system, and no cesses would be applied.

Challenges of Implementing an Expenditure Tax

Nicholas Kaldor, a renowned tax expert, criticized the idea of implementing an expenditure tax system in India. He argued that the country's low-income bracket makes it difficult to assess and track expenditures accurately. Poor individuals who are struggling to meet basic needs would bear the brunt of such a tax, while richer individuals could easily conceal their income to avoid taxation.

Kaldor's analysis emphasizes the challenges in implementing an expenditure tax in a low-income economy. In developing countries, the need to simplify and streamline tax systems to ensure compliance is critical. Direct income taxation remains a more feasible and effective solution, as it directly targets the source of the income, reducing the likelihood of tax evasion.

Reducing GST Slabs and Simplifying Tax Structure

Swami Aniruddha also advocates for reducing the GST slabs to 4, which aligns with the recommendations of tax experts like Kaldor. This simplification would make the tax system more manageable for the common man and reduce the chances of tax evasion. By bringing grain and petroleum products under the GST, the tax system can become more comprehensive while reducing the burden on small businesses.

Furthermore, reducing the tax burden on lower-income individuals would ease financial pressures and encourage economic activity. Higher tax revenues could then be invested in essential public services, infrastructure, and social welfare programs.

Conclusion

While the concept of an expenditure tax system presents an intriguing alternative to the current direct income tax system, the practical and economic challenges suggest that a simplified direct income tax structure, combined with a more efficient GST system, remains the most feasible solution for India. Simplified tax reforms can lead to increased compliance, reduced evasion, and a more robust economy. Moving forward, policymakers must focus on practical reforms that align with the needs of the population while ensuring equitable distribution of tax burdens.