Contents

Background: the direct taxation .............................................................. 2

Current facts on income tax in India: ...................................................... 3
Question of Discussion ........................................................................... 4
From The political economy behind taxation: ........................................ 4
From the economical point of taxation:................................................... 4
Reviving India Economy- Arthakranti Proposal ....................................... 5
It is not such a bad idea either: ................................................................ 6
Arguments in favour of Income Tax Abolition: ...................................... 7
Arguments against Income Tax Abolition: ............................................. 8
Background: the direct taxation

In India, the system of direct taxation as it is known today, has been in force in one form or
another even from ancient times. There are references both in Manu Smriti and Arthasastra to a
variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy
taxes, according to Sastras. The wise sage advised that taxes should be related to the income and
expenditure of the subject. He, however, cautioned the king against excessive taxation and stated
that both extremes should be avoided namely either complete absence of taxes or exorbitant
taxation. According to him, the king should arrange the collection of taxes in such a manner that
the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should
pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and
1/10th of their produce depending upon their circumstances. The detailed analysis given by
Manu on the subject clearly shows the existence of a well-planned taxation system, even in
ancient times. Not only this, taxes were also levied on various classes of people like actors,
dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle,
grains, raw-materials and also by rendering personal service.

The organisational history of the Income-tax Department starts in the year 1922. The Income-tax
Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. The
foundation of a proper system of administration was thus laid. In 1924, Central Board of
Revenue Act constituted the Board as a statutory body with functional responsibilities for the
administration of the Income-tax Act. Commissioners of Income- tax were appointed separately
for each province and Assistant Commissioners and Income-tax Officers were provided under
their control. The amendments to the Income tax Act, in 1939, made two vital structural changes:
(i) appellate functions were separated from administrative functions; a class of officers, known as
Appellate Assistant Commissioners, thus came into existence, and (ii) a central charge was
created in Bombay. In 1940, with a view to exercising effective control over the progress and
inspection of the work of Income-tax Department throughout India, the very first attached office
of the Board, called Directorate of Inspection (Income Tax) - was created. As a result of
separation of executive and judicial functions, in 1941, the Appellate Tribunal came into
existence. In the same year, a central charge was created in Calcutta also.

Computerisation in the Income-tax Department started with the setting up of the Directorate of
Income tax (Systems) in 1981. Initially computerisation of processing of challans was taken up.
For this 3 computer centres were first set up in 1984-85 in metropolitan cities using SN-73
systems. This was later extended to 33 major cities by 1989. The computerized activities were
subsequently extended to allotment of PAN under the old series, allotment of TAN, and pay roll
accounting. These computer centres used batch process with dumb terminals for data entry.
In 1993 a Working Group was set up by the Government to recommend computerisation of the
department. Based on the report of the Working Group a comprehensive computerisation plan
was approved by the Government in October, 1993. In pursuance of this, Regional Computer
Centres were set up in Delhi, Mumbai, and Chennai in 1994-95 with RS6000/59H Servers. PCs
were first provided to officers in these cities in phases. The Plan involved networking of all users
on LAN/WAN. Network with leased data circuits were accordingly set up in Delhi, Mumbai and
Chennai in Phase-I during 1995-96. A National Computer Centre was set up at Delhi in 1996-97.
Integrated application software were developed and deployed during 1997-99. Thereafter,
RS6000 type mid range servers were provided in the other 33 Computer Centres in various major
cities in 1996-97. These were connected to the National Computer Centre through leased lines.
PCs were provided to officers of different level up to ITOs in stages between 1997 and 1999. In
phase II offices in 57 cities were brought on the network and linked to RCCs and NCC

The rapid changes in administration of direct taxes, during the last decades, reflect the history of
socio-economic thinking in India. From 1922 to the present day changes in direct tax laws have
been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen
in the 1961 Act as it stands amended to date. It was but natural, in these circumstances, that the
set up of the department should not only expand but undergo structural changes as well.

Current facts on income tax in India:

In contemporary India, income tax is largely a tax on the middle class salary earner. The poor
hardly pays any income tax. The rich have dividends and capital gains as large part of their
source of income rather than salaries. We could not believe the finance minister when he
mentioned in his last Budget speech that only about 42,800 people have declared taxable income
of over Rs. 1 crore annually. Further, 400,000 people (with incomes more than Rs. 20 lakh, and
constituting 1 per cent of the tax-base) account for 63 per cent of the income taxes collected from
individuals in an economy with a tax paying base of 3-4 crore people. Thus, 99 per cent of
India's taxpaying people are being coerced into filing their tax-returns, while they pay miniscule
amounts as tax on some pretext or other. The guys who pay up are mostly the salaried class,
because they can't evade it, as it gets deducted as TDS.
Question of Discussion

Can India do away with imposing direct taxes on Individuals?

From The political economy behind taxation:

Although largely politically motivated (and you can't fault it purely on this, as all reforms may be
attributed accordingly), the fresh Modi proposition has both merits and demerits and deserves a
serious thinking, especially given the state of the economy, stubborn inflation and with savings
rates having fallen significantly in recent years in India.

The BJP, as per media reports, may incorporate a proposal to abolish income, sales and excise
taxes in its Vision 2025 document, which will be released before the polls. Many in the top
leadership have come out supporting the idea in recent weeks. On January 2, Pune-based anti-tax
group Arthakranti made a presentation to senior BJP leaders, including Rajnath Singh, LK
Advani, Sushma Swaraj, Arun Jaitley, former finance minister Yashwant Sinha and Nitin
Gadkari, on simplifying taxation by a flat Banking Transaction Tax (BTT).

From the economical point of taxation:

Abolishing income tax and other levies and replacing them with some other suitable form of
revenue is both feasible and desirable, say experts, although some believe that such a move
would militate against social equity. It shall certainly lead to an increase in personal savings rate
and help economic growth.
 Reviving India Economy- Arthakranti Proposal

The ArthaKranti proposal is a well-researched scientific approach designed to completely

transform the current Indian socio-economic scenario.
“Arthakranti Proposal” has been given by a Pune (Maharashtra) based “Arthakranti Sansthan”
which is an Economic Advisory body constituted by a group of Chartered Accountants and
Engineers. This funda has been patented by the Sansthan. The government is planning to execute
this proposal in two parts.

Part A –
 Recall and scrap old high denomination notes Rs.500 and Rs.1000.
 Introduction of new Rs.500 and Rs.2000 Notes
 Old Rs.500 and Rs.1000 notes to be deposited into account.
 In 50 days bring around 15 Lac Cr in banks.

Part B –
 Reduce Interest rate on saving bank account from 4% to 2% or less.
 Reduce fixed deposit rates drastically.
 Reduce home loan rate and keep it up to 7-8%.
 Implement GST by 1st September, 2017.
 Abolish Income Tax for individuals.
 Reduce corporate tax rates.
 Introduce new Banking Transaction Tax
It is not such a bad idea either:

The consumption tax, sometimes referred to as a 'spending tax' or 'expenditure tax', is quite like
the income tax, with one key difference being that the tax base is expenditure, not income.
Levied directly, tax payers may still file annual returns accompanied with exemptions and
deductions, if at all. Irving Fisher, writing in 1942, and earlier advocates of the expenditure tax
based their case primarily on the argument that the income tax involved "double taxation" of
savings and distorted the choice of individuals in favour of consumption. Thus, not only is the
income tax unjust but it encourages consumption and leisure at the expense of thrift and
enterprise.

Nicholas Kaldor, in his book 'Expenditure Tax' (1955), broadened the case for the expenditure
tax by arguing that expenditure was a better measure of ability to pay than income. Kaldor
viewed the individual's taxable capacity as his "spending power" which includes all the various
forms of economic wealth (stocks of wealth as well as recurrent and irregular flows of money)
which must be reduced to a common denominator of so much per annum for tax purposes. Also,
allowance should be made for differences in individual needs which make some persons more or
less able to pay than others with the same spending power.

Kaldor argued that the best way to arrive at a person's spending power vis-a-vis his needs is to
look at his day-to-day living expenses. He viewed income as an inferior measure of taxable
capacity because it does not encompass spending power in other forms and takes no account of
differences among individuals as to the need to save.

One major argument put forward against the expenditure tax is that by taking away savings from
the tax-base, one tends to favour the rich, as they are in a better position to save larger portions
of their incomes. This would render the proposition 'inequitable'. It may also lead to greater
concentration of wealth in the hands of few. Kaldor addressed this criticism by arguing that the
rates of an expenditure tax can be made steeply progressive in order to tax the rich heavily. One
would be still better off, as a large part of the spending by the rich is out of capital, which is
generally untouched by the income tax.
Another criticism of the consumption base is that it would favour the miser over the spendthrift,
even where both had the same spending power or ability to pay. Kaldor's response to this
objection goes to the basic rationale of the expenditure tax: People should be taxed on what they
take out of the common pool, not on what they put into it. He argued that only by spending, and
not by earning and saving, does the individual impose a burden on the rest of the community. In
other words, personal consumption drains the resources available to the community for
investment and public uses while work and saving add to these resources. This view may not
find buyers in many other schools of thought. In addition to value judgments as to the fairest
method of direct taxation, important economic considerations are involved in the case for and
against the expenditure tax. One generally accepted merit of the tax is that it would be highly
effective as an anti-inflationary tool. On the other hand, the tax lacks the automatic stabilizing
effect of the income tax in periods of recession. Other economic considerations, such as relative
effects on incentives to work, invest and undertake risks are more debatable.

Arguments in favour of Income Tax Abolition:

1. No income tax means more spending power leading to more demand leading to more
manufacturing/production further leading to more job creation. In short, in a faster
growing economy, Income tax leads to tax evasion as people don't declare their true
income. If there is no income tax there will be no need to evade tax!
2. Elimination of income tax will give a greater incentive to work, since about one-third
of our salary or business profits goes towards payment of taxes, the utilization of
which is shrouded largely in mystery.
3. It shall be the pathway for nationalisation of funds stashed in tax havens to retrieve the
black money. The ills of black money would be abolished if income tax were
abolished. Estimated figures of black money stashed overseas in tax havens run into a
mind boggling figure of Rs 120 trillion or 60 times the revenues from tax collection
which needs to be brought back.
4. It would give taxpayers an incentive to earn more because they would not be penalised
with a higher tax bracket or conceal the real income.
 5. Tax experts and industrialists also believe that it will reduce corruption. Taxpayers will
also not indulge into practices like falsification of accounts, money laundering and
other illegal ways of tax evasion.
6. The loss on income taxes can be made good by higher value-added taxes, especially
the new Goods and Services Tax (GST). Also, there is talk of replacing income tax
with an expenditure tax, where money flowing out of bank accounts will be taxed
which would be another way to fix the tax hole over time.

Arguments against Income Tax Abolition:

1. Abolition of income tax will lead to higher Indirect taxes which are regressive in
nature, i.e., you pay tax as you buy. In India, a problematic consequence of a tax shift
is that, we are likely to see rising prices and a huge dent in consumer and investor
confidence.
2. Income tax is progressive in nature. The rich pay more and in turn this money is used
to benefit the society, including the weaker sections of the country.
3. Replacing income tax with Indirect tax or expenditure/banking transaction tax may
turn out to be anti-poor because of its regressive nature.
However, there is no doubt that eliminating income tax will rejuvenate the economy and reduce
tax hassles at the level of the taxpayer. Unlike promises of free water or cheap electricity, which
can only increase corruption, the abolition of income tax is a reform that will actually make
taxpayers more honest. It will eliminate a huge area of corruption and falsehood while also
serving as an economic stimulus to a stagflating economy.