The Union Budget is about to be presented again, and we, the income tax payers, will most likely be disappointed once more. Over the next few days, social media will be flooded with rage and debates, but soon enough, our attention will shift to the next city or road name change announced by the government—or back to the usual Hindu vs. Muslim arguments.
In this post, I wanted to delve deeper into income taxes in India and organize my thoughts around this hypothetical question: if one day Nirmala Sitharaman came to us and asked, “What do you want the government to do about income tax?”—what would we say?
Why Are Income Tax Payers Frustrated?
Our frustration is aptly summarized by Raghav Chadha’s remark in Parliament: “Indians Pay Taxes Like England & Get Services Like Somalia.”
You hear reports of record numbers of HNIs (High Net-Worth Individuals) leaving India for Western countries, which often have higher tax rates than ours. Why, then, are people who complain about taxes in India happy to pay them elsewhere?
Most of this frustration among taxpayers stems from the following issues:
- A Tiny Tax Base
In India, only about 2% of the population pays income tax, shouldering the financial burden of the entire country. - Rich Non-Taxpayers
Taxpayers often see wealthy individuals who don’t pay income tax, such as:- Business owners operating mostly in cash, avoiding taxation.
- Corrupt government employees earning far more than their official salaries.
- Wealthy farmers who exploit tax exemptions meant for genuine agricultural income.
- Subpar Infrastructure
Our roads, medical facilities, and education systems lag behind not only Western nations but also neighboring countries like Thailand and Vietnam. - Burden of Freebies
Many taxpayers feel weighed down by the government’s focus on distributing freebies, which are often funded by their hard-earned money. - Lack of Gratitude
There’s little acknowledgment of taxpayers’ contributions. Instead of appreciating taxpayers, ministers often make dismissive statements, suggesting that taxpayers should change their mindset about taxation.
A Political Disclaimer
Before we proceed, let me clarify that this is not a political post. I generally lean toward the center-right and usually support BJP policies. However, supporting a government does not mean endorsing every decision it makes. Moreover, this isn’t solely a BJP issue—Congress governments in the past also ignored taxpayers while promoting freebies and delivering even worse infrastructure.
With that out of the way, let’s dive into some potential solutions.
Proposed Radical Changes
1. Abolish Income Tax
Abolishing income tax altogether may sound radical, but it has been implemented successfully in some countries. For example, Dubai’s zero-income-tax policy has attracted significant global wealth and FDI, boosting its economy.
Subramanian Swamy has long advocated for this idea. However, for a large country like India, a complete abolition of income tax would need to be phased and carefully planned. Strong messaging around the benefits—such as attracting foreign wealth through low taxes and a promise of eventual zero taxation—would be crucial.
2. Tax Wealthy Farmers
While farmers often demand subsidies, it’s essential to distinguish between poor farmers and wealthy ones. Taxing the top tier of farmers—those earning ₹50 lakhs or more annually—could be a starting point.
The government could account for agricultural costs by estimating profits using a presumptive taxation model, similar to Section 44ADA for freelancers. For example, 25% of agricultural revenue could be considered taxable income.
3. Reform Corporate Taxes
While corporates are taxed, many exploit loopholes to avoid paying their fair share. To address this, corporate taxes should include a minimum alternative tax, such as x% of revenue or y% of profits, whichever is higher.
For example, if the automotive industry typically earns a 10-15% profit margin, the government could mandate a tax of at least 8% of revenue or the actual profit-based tax, whichever is higher. This would ensure fair taxation while closing loopholes.
4. Tax Wealthy Small Businesses
Many small businesses, particularly those operating in cash, evade taxes entirely. Addressing this group requires both incentivization and enforcement:
- Introduce a simplified tax scheme, such as a flat 5% tax on revenue for small businesses.
- Use PAN-Aadhaar-linked expenditure data to identify individuals spending above a certain threshold without reporting adequate income.
- Launch a “Jagruk Janata” program, encouraging citizens to report tax evasion anonymously.
5. Tackle Bribes with a Tatkal Seva
Corruption in government offices is a well-known issue. Citizens are often harassed with repeated visits and veiled demands for bribes to get basic work done.
Introducing a “Tatkal Seva” in government offices could formalize this process. For a fee—equivalent to the typical bribe—the work could be expedited officially, with the government taxing this income. While controversial, such measures would reduce harassment, improve efficiency, and bring transparency to grassroots corruption.
Ultimately, many of these measures could be avoided if India shifted to a taxation model primarily based on expenditure, like GST, eliminating income tax altogether. While such ideas may seem unconventional, addressing the frustrations of honest taxpayers demands innovative thinking and bold reforms. That said, implementing these changes requires immense political will. Now, let’s focus on what is realistically achievable—steps the government can take if we, the taxpayers, come together and make our voices heard.
Proposed Practical Changes
1) One Nation, One Tax Liability
People who have paid income tax should get all other taxes as deductions while filing their tax returns. For example, if Ashok’s employer has deducted ₹12 lakhs as TDS and deposited it with the Income Tax Department, when Ashok logs into his 26AS on the income tax portal, he should see the following:
- All GST paid on online purchases like Amazon, Flipkart, Myntra, Zomato, Swiggy, Urban Company, and other platforms.
- All amounts paid during car/bike purchases like road tax, GST, service charges, etc.
- All toll taxes deducted from FASTag.
- All GST paid for flight, train, or hotel bookings.
- All amounts paid for house or land registration.
- All capital gains, both short-term and long-term.
If the total of all these amounts for Ashok in the last financial year was ₹5 lakhs, Ashok should pay income tax on only ₹12 lakhs – ₹5 lakhs = ₹7 lakhs, with the rest refunded to him.
Implementation: Nationwide implementation will take a few years. All online platforms should be able to push GST data linked to PAN numbers. However, offline GST payments will be difficult to track. We could try to cover this by integrating with UPI, but this needs deeper thinking.
2) Unemployment Insurance for Income Tax Payers
People who have paid income tax for the last 3 years should be enrolled in the Pradhan Mantri Rozgar Suraksha Yojana, where, if a person loses their job, they receive 1/3rd of their salary (approximately the tax paid by them) per month for the next 2 years.
Implementation: The government could ask insurance companies to bid for this and pay a small percentage of the tax given by people as a premium to the insurance company. Since the percentage of people losing their jobs will not be very high, insurance companies could easily manage this while making money in the process.
3) Recognition of Income Tax Payers
The government should declare Feb 01 as National Income Tax Payers’ Gratitude Day and do the following:
- Invite a few selected income taxpayers to the President’s House and present them with a medal by the President of India. The invitees would include:
- The top 100 income taxpayers.
- 100 randomly selected income taxpayers from the rest.
- 100 others who purchase tickets to attend the event through a regular auction. Many people might be interested in buying a ticket for the opportunity to meet the President of India and the richest people in India, generating funds for the event.
- All other income taxpayers who are not invited to this event would receive an email from the President of India thanking them for their contribution to nation-building.
Conclusion
Addressing the frustrations of India’s income taxpayers requires both bold reforms and practical solutions. While eliminating income tax and shifting to an expenditure-based model like GST could revolutionize the system, immediate steps like “One Nation, One Tax Liability,” unemployment insurance, and greater recognition for taxpayers are actionable measures that can restore faith in the system. Implementing these changes would not only slow down the exodus of High Net Worth Individuals to western countries but also strengthen our economy by encouraging wealth retention and fostering growth. By taking these steps, we move closer to realizing Prime Minister Narendra Modi’s vision of making India a developed nation by 2047.