We keep hearing Indian banking system is not affected by global financial meltdown, is it true? We keep saying "World is Flat" so obviously our banking system is effected when global economy takes turn and global financial system is taking a tail spin. We may not have a big issue as sub-prime crisis in the U.S, large part Indians do not take more than 50% of value of home loan. Although there is 20 to 30% correction in our real estate, overall banks do not have much risk like in the U.S. In the U.S, folks used to get interest only loans, home-equity loans, one loan for the mortgage and another loan for down payment etc. Many home owners have multiple loans against the same house they own, because of the soft real estate market it is actually better for a home owner to turn their keys to the bank than continue to take responsibility for their loans. We don't have quite similar situation in India, we are still a growing economy and don't have sufficient land for large population we have so it is unimaginable for India to face 50 to 70% correction in real estate prices as they have in the U.S.
Our banks are struggling for liquidity, we have heard multiple news on how government is trying to inject 20,000 Crores etc. Let us face the fact, in India, we have two economies: Accounted money (white) and unaccounted money (black), both of them play a role in our economy. If you exclude private, public and govt employees, only a minuscule percentage of population actually pay income tax to the government. Other than employees, no tax payer would pay fair share of tax. Based on these facts, it is quite obvious we have significantly large population does not pay income tax and black money continue to play significant role in our economy. My suggestion to the government is to abolish personal income tax all together. This way we don't have to deal with parallel economies and create open & transparent economy. Although black money is heavily being used in our economy, it has many restrictions: to large extent black money does not come to stock market or our banking system. If you abolish income tax, there is no question of black or white so it should improve liquidity dramatically. Most of the black money is used to pump-up real estate prices; instead it will drive innovation and entrepreneurship. Abolishing personal income tax is not a new theory, it is being proposed by many U.S presidential candidates in the past.
How does government generate revenue if we abolish personal income tax, do you know less than 10% of our central govt budget is accounted by personal income tax? In place of personal income tax, introduce tax at source based on consumption or manufacturing or goods/service offerings – very similar to taxation on our textile industry. We can actually generate bigger revenue than through personal income tax since we will have open & transparent economy folks will spend more. We can simply identify a selective list of goods and services to fall into this tax bracket, example: cars – India is about to join million automobile club soon which means on average if govt charges 1 lakh per car, it will boost tax revenue by 10,000 Crore income; cell phones is another one, there are 200 million cell phones in India, even 100 Rs per cell phone tax would generate 2,000 Crore income; usage of cell phone service, if govt taxes 10 Rupee per cell phone per month, it will generate at least 2,000 Crores… of course biggest of all is fuel, just eliminate all energy subsidies and tax 5 Rupee per liter based on production at the refinery it will generate enough money to offset most of the personal income tax. We just need to come up with 15 to 20 products and services primarily consumed by upped middle class or rich people and come-up with a tax at source system to offset personal income tax revenue loss to the government. Yes there may be small impact on lower middle class if we target fuel/cell phones but it is very much manageable when you consider the impact of open economy on job creation, stronger banking system, promoting innovation and entrepreneurship.
I am not suggesting that govt has to take this plan as I laid-out; this is just a simplified view point. Yes if we want to eliminate black market we can by abolishing personal income tax, this is very practical and out of the box approach for India. In general, it is much easier to collect tax revenue from large corporations (public & private) than individuals. These corporations are accountable for their shareholders, if they cheat on taxes there is direct impact to stock performance in the long-run so they tend to pay fair share of taxes compared to individuals. What is the incentive for corporations to take burden of tax collection, to begin with they will be able to sell more products and services due to fruits of open and transparent economy. If they don't like to be in the business of tax collection at source there is no pressure on them to continue doing business.
If you can combine abolishing of personal income tax with balanced budget and paying off national debt through converting entire black money into white by paying one time flat tax of 10%, India can become self-reliant on our financials. India should take more measures to boost internal economic conditions than depending on exports. If we can make better goods and services and depend on fewer imports and boost internal consumption, India can become a developed nation. Unlike Korea and Japan, we don't have to depend on export economy. Of course, I always say that Govt must stop spending more than we have and it must stop borrowing from external sources.