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Can Abolishing Personal Income Tax Solve The Black Money Problem? Research Team | Posted On Friday, November 18,2016, 05:18 PM

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Can Abolishing Personal Income Tax Solve The Black Money Problem?




“Make sure you pay your taxes; otherwise you can get in a lot of trouble.”

                                                                                                                                                    - Richard Nixon

Yes, Richard Nixon, the former President of USA, tells you how important it is to pay income tax. Hardly 3% of Indian citizens pay income tax. Our citizens believe in tax evasion…not tax avoidance. Tax evasion is a crime, tax avoidance is not. You have to pay income tax, but you do not pay it. This is tax evasion. If caught, you have to not only pay the tax, but also a severe penalty and possibly a jail term.  Tax avoidance is the use of income tax deductions like Section 80C and tax exemptions, offered to you by the Government, to save tax. It is a crime, if you do not make use of these tax deductions and exemptions, to save your hard earned money.

Now let’s discuss something really important…What if personal income tax is abolished? Can this solve the black money problem? Want to learn more on tax planning? Just contact Our commitment is to help you “Save, Invest, Spend and Borrow Consciously." offers Free, Unbiased and on-call financial advice on Insurance, Mutual Funds, Real Estate, Loans, Bank Accounts and Capital Markets.

Why deducting TDS from salary is good?

The Government knows that only 3% of Indian citizens, pay income tax. The Prime Minister has scrapped 500 and 1000 rupee notes, effective November 8th 2016. Now hiding black money is getting really difficult. The Government believes this move, can catch citizens who evade taxes. But is not abolishing personal income tax a better idea? Every month, you and several citizens, get a salary slip. The salary slip shows all deductions made, before you get what is called, take home salary. The common deductions are TDS (Tax Deducted at Source), contributions to your EPF (Employee Provident Fund) and contributions to your Group health insurance plan.

Wonder why all these deductions are made from your salary? Simple…if these deductions are made voluntary ….chances are, you will not pay income tax or make contributions to EPF for retirement. So… tax dues are deducted from your salary through TDS, even before you get your salary. Simple…The Government doesn’t leave the decision of paying income tax to you. It takes its share upfront, before your salary comes in your hand. Where is the chance for you to evade taxes?

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Why personal income tax is not efficient?

The Government expects you and several citizens, to pay income tax on your own. This is asking crores of citizens to pay income taxes, out of goodwill. This is not going to work. There are crores of citizens in India. How will income tax officers chase so many people? Citizens have to declare their income and then calculate their own tax liability. Citizens then pay income taxes. Only in some cases where TDS is deducted from salary, do citizens bother to file income tax returns.

In the financial year 2012-2013, only 2.87 crore citizens filed their income tax returns (ITR). Out of 2.87 crore citizens, nearly 1.62 crore citizens did not pay any tax. Only 1.25 crore citizens actually paid income taxes. What do you learn from this? The method of collecting taxes through personal income tax, is a bad idea. In a country with crores of citizens, evading taxes is not too difficult.

Is there an alternative to personal income tax?

You have consumption and transaction taxes, which the Government can easily recover from manufacturers of products and services. Let’s say that whenever you buy a loaf of bread, you pay the Central Government, a 3% tax. This tax is not collected from the shopkeeper or any middle man. This tax is collected from the baker/manufacturer, when he applies MRP (Maximum Retail Price), to the bread.

This tax is impossible to escape. The Government can easily collect tax revenue. These taxes are called indirect taxes and can be increased by the Government. The problem with this….Things become expensive for the poor. Under the income tax rules, you have to pay tax, only if your income exceeds a certain amount. In indirect taxes, everybody pays taxes. The problems faced by the poor, due to high indirect taxes can be solved, through market based social welfare schemes for the poor. They can also be tax credit subsidies, for citizens living below the property level. The massive Aadhaar enrollment scheme and the RuPay payment network by the National Payments System, can make this process, a resounding success.

Yes…The present method of collecting income taxes, has its flaws. The Government can get higher tax revenues if it implements a nationwide transaction tax. This is even ahead of the GST. This method can solve the problem of tax evasion, at its root.

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