What is your view on Subramanian Swamy’s statement of abolishing income tax? by Ashok Dhamija

About Author  : Ashok Dhamija , Supreme Court Advocate, Former IPS 

I think Dr. Subramanian Swamy appears to have stolen my idea. Well, I am kidding. But, let me tell you, I have also been thinking on the same lines, i.e., of abolition of income tax, for last 20 years or so. I’ll explain my own reasons as to why do I support abolition of income tax and how it will help India.

But, before that – a disclaimer. I am not an economist. However, I have been regularly reading the Economic Times for last 40 years. I have also been reading other financial newspapers for last 20 years or so. In 1999 when I left IPS, several of my articles were published in the Financial Express (some of them are still available online on FE website); thereafter, due to my other professional engagements, it became difficult to continue writing in FE. So, with all humility at my command, I can claim to know a “little” about economics. In any case, economics may perhaps be better handled by common sense than by hard-core naysayer economists.

As per the revised figures, for the financial year 2016-17, the total income tax collection was Rs. 3.53 lakh crore and total corporate tax collection was Rs. 4.94 lakh crore.[1] It is noteworthy that while corporate tax is shown separately, it is actually income tax on companies and derives its legal authority from the Income Tax Act itself. So, we can say that the total income tax collection (for all persons, including companies) was Rs. 8.47 lakh crore.

I believe that if income tax has to be abolished, then income tax on companies (called corporate tax) is also be abolished, since it is the latter which may be more beneficial to the economy. The Government itself realises the importance of a lower tax on companies vis-à-vis the individuals. For example, in the latest 2018 Budget, the Government has reduced the corporate tax to 25% for companies whose annual turnover is up to Rs. 250 crore. This is the base rate (i.e., without cess/surcharge etc.). Compare it with the base rate of 30% income tax for individuals whose income is more than just Rs. 10 lakh. The Government, thus, realises that lower corporate tax spurs business growth, and thus benefits the economy.

Now, suppose income tax (including corporate tax) is abolished, what are the consequences?

Let us consider it in two components.

Firstly, the corporate tax component of Rs. 4.94 lakh crore. If the companies do not have to pay this much tax, where will this money go? Will it disappear from the economy? No. It will mostly remain with the companies. So, what will they do with this additional money? They will invest this money in further businesses. Even if some of this money is kept in banks, it will go to businesses through bank loans. So, the fact remains that most of this money will get back in business growth. In the form of more industries. More employment. More production. More growth. More GDP. Moreover, abolition of corporate tax will make our companies highly competitive at the world stage (by as much as about 20-25%), leading to export-competitiveness and thus more exports. And, a virtuous cycle starts.

Also note that when there are more industries and more businesses with this additional money, there will be more production and more services, and this will lead to a big spike in GST collections. So, some amount of the above money will directly or indirectly come back to the Government, year after year; not from the original kitty but from the enhanced kitty of new businesses. And, this will be with a compounded rate of growth as this will happen year after year on more and more enhanced base.

Before I move further, let me highlight the magic of compounding, for the benefit of those who are not aware of it. It is pure black magic. Compounding is the Eighth wonder of the world. Give a minute to me to explain it.

A chessboard has 64 squares (8×8). I place grains of wheat on this chessboard, in such a way that the first square has 1 grain, the second square has 2 grains, the third square has 4 grains, the fourth square has 8 grains, the fifth square has 16 grains, and so on. This means, the number of grains placed on the next square is double of those on the previous square. In this manner, all the 64 squares are filled with doubling the number of wheat grains vis-à-vis the previous square.

So, what is your estimate, how much wheat would be needed? 1 kg? 10 kg? 100 kg? Now, please get ready to get the biggest shock of your life. It would be more than the quantity of wheat than has EVER BEEN produced by the humanity till date!!!

Let me show you how. The total number of grains of wheat required in the above chessboard calculation would be 18,446,744,073,709,551,615. This is about 18,446,644 TRILLION. See the calculation formula for this at this link in the footnote.[2] Or, you can do the calculations manually – a tough task indeed.

Now, the weight of a single grain of wheat is about 65 milligram.[3] This means that there are about 15432 grains in 1 kg of wheat. When we divide the above number of 18,446,744,073,709,551,615 grains by 15432, we get 1195356666259043 kg of wheat required to fill 64 squares of chessboard. This is equivalent to about 1995356 Million Tons of wheat. Now, in 2014, a total of only 729 Million Tons of wheat was produced in the world as a whole.[4] This means that at this rate, we need production of 2737 YEARS of wheat of the whole world to fill the chessboard with wheat grains!!! Remember, in the past years (say a few hundred years back), wheat production was much less.

So, do you now agree with me that compounding is pure black magic and that it is the Eighth wonder of the world?

Well, let me now come back to the main issue. So, if Rs. 4.94 lakh crore is invested by corporates in further industries EVERY YEAR and the resultant income is further invested using the magic of compounding (though here, the rate of compounding will be less and so the chessboard story is not applicable to the full extent), you can easily visualise the impact on the economy, the employment, the GDP, the growth, the development, etc.

Okay, let me now come to the second component of income tax, i.e., Rs. 3.93 lakh crore which is collected from individuals, firms, HUFs, etc. Suppose this income tax is abolished. It will put this much additional money in the hands of individuals. Most of it will go to banks as savings. Some of it will go to stock markets and other assets. So, basically this part will also go to add to growth of business / industry, since banks will ultimately lend mostly to businesses. So, the above virtuous cycle would be repeated mostly with this component too.

And, the remaining amount out of Rs. 3.93 lakh crore will be spent on consumer goods. Remember, most of this income tax is paid by rich or salaried people. So, here again, the Government will get more GST on the additional goods purchased and the industrial demand will increase (for consumer goods).

The net effect is that out of the total of Rs. 8.47 lakh crore, that will become available with individuals and companies, EVERY YEAR, most of this money will spur industrial growth, GDP growth, more GST, more employment, etc.

So, Narendra Modi’s MAKE IN INDIA will get a real boost. Unfortunately, till date, Make In India is not successful as it was expected to be.

Let me tell you the truth. The story so far is only half-told.

The real benefit will come from somewhere else. No, I am not talking of eradication of black money. I’ll come to that issue a slightly later. Right now, I am talking of something else.

Zero corporate tax rate can attract tremendous amounts of Foreign Direct Investments (FDI) in India from abroad. India has the so-called demographic dividend. It has skilled manpower. It has natural resources. Its infrastructure is also now reasonably OK. If we can abolish corporate tax, it can lead to rush of FDI in India. A multinational company investing in India can get an added advantage of about 22% through zero corporate tax vis-à-vis, considering that the average corporate tax rate in the world is about 22%. This is a huge benefit for corporates – the MNCs. It improves their competitiveness. Remember, MNCs look always for competitive advantages when they invest in various countries. A lot of manufacturing and services industries can shift to India from other countries, especially from China. India can become the world factory, much like what China is today.

This will be a real boost to MAKE IN INDIA. We cannot visualise the benefits that can accrue to India, in terms of GST collections, more employment, better GDP growth, becoming an industrial and developed country. And, so on.

Well, all said and done, for the present, let us forget all the above benefits. In the worst to worst situation, the loss of taxes due to income tax abolition can be met by increasing GST on luxury or sin goods by a few percentage points. As I mentioned above, income tax is mostly paid by rich and salaried people. It is they who mostly consume luxury goods. The GST rate on essential goods is already very low, either ZERO or 5% or may be 12%. So, if you increase GST by a few percentage points on the luxury and sin goods, it is not going to affect poor population. It will mostly affect the rich sections of the population, which are given the benefit of abolition of income tax. Note that GST is designed in such a way (with input tax credit and reporting of backward purchases) that evasion of GST will become very difficult. And, this is the worst scenario, as I am of the considered opinion that we may not even need GST rate hike. Other forms of alternative taxation, such as a marginal bank transaction tax may perhaps also be considered.

What are the other benefits of abolition of income tax?

Eradication or at least drastic reduction in black money. We have two types of taxation. Direct taxes and indirect taxes. With the introduction of GST in the field of indirect taxes, the tax evasion will become more and more difficult over next one year or so, once GST fully settles down. This is so because its design takes care of evasion of taxes to a great extent. Further improvements can be made (along with strict implementation) to ensure that there is no evasion of GST.

But, it is difficult to completely stop evasion in Income Tax, i.e., in the field of direct taxation. If income tax can be abolished, then there would be no need to evade taxes.

This will ensure that there would hardly be any black money, except due to corruption, which I shall be dealing with in a separate article / answer, sometime in the near future. In fact, black money itself gives rise to a lot of corruption, since you have to bribe the tax officials and politicians to hide your black money. So, reduction in black money will reduce corruption also, to some extent. In any case, this question is not related to corruption. It is about taxation.

So, no black money will remain stashed in gunny-bags, godowns, secret cupboards, etc. Most black money will come back to the mainstream, in circulation. This will further spur economic growth, more businesses, more taxes, etc.

At present, many rich people evade income tax by showing the income as agricultural income or otherwise keeping the money stashed in property, gold, jewellery, etc. India has tens of thousands of tons of gold, which is of almost no use to the economy, instead it is harming our economy since we are one of the largest importers of gold. Removal of black money may release such hidden capital to the real economy – industry, business, etc., thereby helping our economy grow.

As it is, poor people never pay income tax and rich generally evade such taxes. Middle class – especially the service class – have generally less chance to evade the income tax. It is noteworthy that only about 2.5% Indians pay income tax. A substantial portion of income tax evaded by rich, lands in the pockets of the Income Tax officials by way of bribes.

Abolition of income tax can thus lead to a simpler system. People will tend to be more honest in their business dealings. As mentioned above, loss of taxes due to abolition of income tax can be more than compensated by much higher investments in industry and business, drastically increased FDI from abroad, more GST collections, more growth, more employment, etc. Still, if needed, GST rates in luxury goods and sin goods can be tweaked to compensate for loss of income tax; and, chances of evasion of GST are comparatively much less due to the system on which it is built (input tax credit with backward purchase reporting). The alternative taxation proposals such a marginal bank transaction tax may perhaps also be considered. In the worst scenario, if needed, in the initial few years, disinvestment in PSUs can meet the revenue targets, till the virtuous cycle of investment and growth pays its dividends to the public exchequer.

If you want to move to a cleaner system, with drastically reduced black money and the virtuous cycle of investment and growth, abolition of income tax is a good option.

Remember, during the emergency period in 1970s, the maximum income tax rates used to be more than 90%. Now, the income tax rate ranges from 5% to 30%, and yet the heavens have not fallen. Abolition of income tax can be good for the nation, in the long run. And, it would be good for the ruling party, in the short run, since it can win back power through votes of middle class.


[1] https://www.indiabudget.gov.in/b…

[2] Wheat and Chessboard Problem

[3] Grain | unit of weight

[4] International wheat production statistics – Wikipedia

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