Should India Go for Consumption Tax?

  • | Monday | 19th November, 2018

With the Government on the verge of becoming lame duck after December due to the looming Lok Sabha elections of 2019, it’s doubtful if the Government will go for such a revolutionary change in tax system.                              By Dinesh Sharma

New Delhi Nov 16: A section in the present political dispensation has dusted off the old economic debate calling for replacing the income tax with the consumption tax. It’s being argued that the abolition of the consumption tax will not only make economic sense but pay political dividends as well.

The advocates of the idea have cited the case of Japan where there has been several bouts of raising the consumption tax to kick-start the moribund economy. Although Indian and Japanese economies are at different levels of development, it has been pointed out that drastic reduction or wholesale abolition of income tax would have multiple benefits.

The middle class in India looks for lower slab of income tax every time the Union Government presents the annual budget. The main grouse is of salaried class which says that it suffers double whammy due to income tax and the inflation. Besides,  small businessmen and self-employed find the income tax coercive.

It’s being argued that the replacing income tax with consumption tax will give people much needed incentive to save.  This will place more money in the banking and financial systems. And for the government it will help win the hearts of the middle class which is the most influential chunk of the electorate.

The proposition of replacing income tax with the consumption tax was raised many times in the past but was spiked as the government could not risk drastic dip in the revenue. By mopping income tax the government can at least be sure of the money coming to the central kitty.

What has apparently tilted the argument in favour of the consumption tax is the success of the General Sales Tax (GST). After the teething troubles and technical glitches, the GST has stabilized. According to the data released by the Government of India, the GST collection is expected to cross one lakh crore in November and December of 2018.

Although the collection would reflect the festive season when normally sales shoot up, the figures compared with earlier quarters show a secular rise in the expansion of the GST base. Therefore, the Finance Ministry reckons a continued trend in rise in tax collection through GST.

With the Government on the verge of becoming lame duck after December due to the looming Lok Sabha elections of 2019, it’s doubtful if the Government will go for such a revolutionary change in tax system. That the issue is being discussed in some influential circles is significant in itself.    


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