What if the 2024 Budget eliminates income tax in India?!🤨

Increased consumer spending due to higher disposable income in an Indian market, showcasing the effects of raising the income tax threshold.

Hey Guys, here is a thought-provoking experiment on tax laws in the upcoming budget.  Let me know your views on this!

The Current Tax Landscape in India

As the Budget for 2024 in India approaches, one of the main interests of the masses is the new tax laws. Regardless of the country's economic performance, the most common demand of the residents is always the lowering of income tax. This remains a popular demand among the general public. In this article, let's explore a straightforward yet thought-provoking experiment on tax laws.

Elimination of Income Tax in India: A Hypothetical Scenario

Currently, an average Indian citizen has to pay income tax when their annual income exceeds 3 lakh Rupees. Let's consider a hypothetical scenario: what if the Indian Government raises this minimum income threshold to 15 lakh Rupees per annum? This means that any individual earning less than 15 lakhs wouldn't have to pay any tax. Sounds like a dream, right? For many, it is, but let's examine the implications of this imagined tax law. Income tax in India

Economic Implications of Increased Disposable Income

The Indian Government's main source of income is tax revenue. With a significant decrease in this income, the government would likely reduce its capital expenditure substantially, meaning less investment in the country's growth. However, here's the mind-boggling question: won't private sector companies and firms still progress, and at what rate?

The economic balance of raising the income tax threshold: weighing the trade-off between tax revenue and public services in India.

To answer this, let's start with the obvious. When income tax is eliminated for people earning less than 15 lakh, they will have significantly more disposable income. Human nature suggests that more money in hand leads to increased spending. Imagine a person earning 100 Rupees, previously paying 20 Rupees as tax, leaving them with 80 Rupees. They would shop with a budget of 80 Rupees, likely buying cheaper groceries or limiting their purchases. Without the tax, their budget and mindset expand. If they previously bought one packet of chips, they might now buy two. This increase in purchasing power would result in a more vibrant economy, with more spending driving more production and industry growth.

The Inflation Effect: Is More Money Always Better?

But here comes the interesting part... as the demand in the market is going to expand, so are the prices. A seller will only sell his goods at rates his consumer can afford; this statement is one of the most fundamental principles for any successful business. Consequently, the price of the packet of chips would be increased from 10Rs to 15Rs, knowing that the end customer will and can pay the price for it. Do you get what I'm saying here? Effectively, increased cash in hand has no value; the amount of goods you would have purchased and will purchase will be the same.

Unintended Consequences for Low-Income Individuals

Now that we have analyzed the different outcomes of tax deductions, let's look at it from a different perspective. Removing income tax could sound appealing to people who previously had to pay taxes, right?! But now, see it from the perspective of those who were never in the income tax bracket to begin with. It would be severely unfair to them, wouldn't it?

Let's, for instance, assume that our earlier hypothesis about increased prices on consumer goods holds true. Imagine the effect this would have on people in this bracket. Their income has remained the same, but the prices of goods have increased, leaving them severely affected. Moreover the reduction of the governments expenditure on public services will add to the effect.

Conclusion:

I will end this article by saying that lowering of income tax by any government is nothing but a political stunt. I have always believed that politics is a game of chess, and this would be a classic attempt at checkmate.