Humanities Project - Final Report

The concept of a Tax-less Society

Ankit Srivastava (200730007)

Shashank Pandey (200730024)

Monsoon 2010
Introduction
In the previous two reports, we saw that what happens in the economy i.e.
how does the Government generate the income needed to help people in
providing the basic civil amenities of life like roads, drinking water,
electricity, houses etc. We concluded that in order to get the money to help
people, it must come out from the people itself whom it tends to serve.
Apart from this source, they have other sources as well like charities, foreign
exchange but the Government keeps that money as a reserve for the future
use. We also saw that the burden of income tax is mostly because of the fact
that our income tax laws are very complicated in their definitions. Besides,
some of the taxes come under multiple categories and as such a common
man has to pay for them under all the categories.

Also we concluded that peasants and farmers are the ones who are
exempted from the taxes. However the ones in the areas of Punjab and
Haryana are rich and need not to be exempted. But once the rules are
written, they do not generally change.

In the second part, we saw how various taxes are implemented and what
their basic definitions are. We found that how is the Personal Income Tax
beneficial to Government and to some extent very harmful in the way a
person has to compulsorily pay a certain share of its income to the
Government whether he likes doing it or not.

We also did an analysis that what will happen in case the Income Tax is
abolished. We concluded that in most broad view and for a layman, it will be
very beneficial because he will earn his complete share of income. The
Government can then increase the Indirect Taxes so that the loss of income
can be compensated. If this is done, then the purchasing need of an
individual will increase and he can spend more.

In short we concluded that the tension from the mind will be removed
because he doesn’t have to pay anything compulsorily. As such, his
contribution towards his job will improve and he can produce more goods - a
benefit for the economy.
In this part of the report we will try to make a practical analysis that how
much can an individual save incase the Income Tax is abolished in terms of
money. We will use some of the standard results from the economic terms
because it is not possible to exactly understand how these terms work and it
is a separate subject of research in many places.

Case 1 - Learning By Example

Here we take an example of a person in the IT sector working in some ABCD
company with an annual package of about 5.26 Lakhs. We take this figure
because most of the people recruited freshly into the IT sector have the
salary package close to this number differing about +10 to -10 % range.

We will try to find out how much income tax is he supposed to pay if the
Personal Income Tax is applicable. We will then try to find out how much can
he save if the Income Tax is abolished with a certain increase in the
commodity prices of most of the commonly used services.

It is quite possible that we may make certain assumptions which may or

may not be very practical but we will try to be close to the practical values
most of the times we can.

A simple example:

Income-tax (Including Surcharge,EC & SHEC) on Rs. 526,000 is

Rs. 40,376.00
Surcharge Rs. 0.00
Education Cess Rs. 784.00
Secondary and Higher Education Cess Rs. 392.00

Cess is basically an income tax on taxable income of individuals, Hindu

Undivided Families (HUFs), companies, firms, co-operative societies and
trusts (identified as body of individuals and association of persons) and any
other artificial person. Levy of tax is separate on each of the persons.

It is used apart from the complex tax of VAT.

As such he is only able to use the maximum possible value of about 4.85624
Lakhs which is about 90% of his income.

If we take a higher value of income such as about 8 Lakhs, then he will have
to pay

Income-tax (Including Surcharge, EC & SHEC) on Rs. 800,000 is

Rs. 96,820.00
Surcharge Rs. 0.00
Education Cess Rs. 1,880.00
Secondary and Higher Education Cess Rs. 940.00

The percent of his income i.e. about 88% will only be used.

As the net income of an individual keeps rising, we will find that his net
share (percent) of his maximum possible income that he can spend keeps on
decreasing.

We make our further analysis by proceeding with the initial example.

Monetary analysis while paying the tax

Here we will find out what happens when he goes to the Income Tax Office
to pay his fair share of the Income i.e. how much he will lose whenever he
has to go to the Income Tax Office and file his returns.

While on the way to the Income Tax Office, he will have to pay for the
transportation which will further create the problems for him because like
him many others are also going to the same location and as such there is
also likely to be a traffic jam.

Here we neglect the delays due to traffic.

We make an analysis for 1 month and then the same can be generaliz ed for
the other 11 months as well.

Let’s say that he spends one way money of Rs 20 to reach the Income Tax
Office. --- eq. 1
Let’s say that without any further problem and assuming no chaos at the
Income Tax Office, he spends there about 1 hr to finally pay his taxes.

Assuming that he works about 8 hrs a day, his avg pay is about Rs 1441 per
day. He gets paid Rs. 180 for every hour he works.--- eq 4

On the day of going to the Income Tax Office, he loses Rs. 180 minimum
just because of the wait time.

Making another reasonable assumption that by the time he is free from

there, he again has to reach in time so that he does not keep losing money
and his work does not keep increasing.

Say this time lost is about 1 hr owing to the traffic and other secondary
delays.

As such he further looses Rs 180. So he loses a minimum of about Rs 360

just to fill his taxes with all the proper formalities.--- eq 2

He spends about Rs 50 in one hour journey to go from the Income Tax

Office to the place of his location(work location).---- eq 3

So in all he spends (eq1 +eq 2 +eq 3) ::: Rs 20+ Rs 360 + Rs 50 = Rs 430.

This is huge amount of money, almost equivalent to one-third of his day’s

income.

Off course he can compensate for eq 4, eq 2 by working overtime which is

what most people actually do.

Again, this was the complete ideal case which involved no other secondary
delays.

Now we consider a more practical case which might involve some very
controversial (because they may not happen to everyone) and complex
assumptions.

Eq1 can be easily modifies to Rs 30 because there will always be traffic in

the road, traffic signals etc which will take time and money. --- eq 5

His time to reach the destination can be easily increased by about 20 mins
(Rs 60 lost) on a really big metro and even on a early morning. –eq 6
This will get the man in lot of tension as he is wasting/spending his time to
do something which is a compulsion from the Government side.

The real trouble starts from here where he meets the real culprits - the
Babus who will try to extract some bribe for the work they are supposed to
do honestly.

Here the man will pay Rs. 3364 (the supposed income tax for one month)
along with a quite possible bribe of about Rs 500 at various places inside the
Office since there are various departments inside the office. Here due to so
much pressure and anxiety in the environment, it is likely he might easily
spend about 3 hrs in the office. Let’s take that he spends about 2 hrs since
our man paid the bribe to get things done relatively quickly.--- eq 7

While going back to Office he further spends his Rs 50 plus almost 1 hr

(loses 180) due to the traffic .-------- eq 8

In all he loses about eq5+eq 6+eq 7+ eq8:

Rs 30+Rs 60+Rs 3364+Rs 500+Rs 180+Rs 50=Rs. 4184 atleast.

Multiply it by 12 we get that he spends about Rs 50208 as Income Tax plus

the Overheads involved.

This limits his spending capacity to 87 % from 100 %. Note that we have not
considered the case where the man has to also file the returns in which he
may lose further money in coming and going to the Income Tax Office again.

Note- We did not consider the fact that many of the people do visit the
income tax consultants as they want to find ways to evade the tax for as
long as possible. As such they enlist themselves in various Government
schemes. They off course have to pay the consulting fees which vary hourly.

Case 2 - No Personal Income Tax

Now we take the case where we completely abolish the Income Tax and let
the prices of other commodities increase.
Let us take for example that the prices of the following commonly used
goods increases by these amounts:

Items Price Rise (in Rs)

Tea 3
Hair Oil 2
Soap 2
Match box 1
Electricity 8(per unit)
Petrol 2 per liter
Processed Food 5 (per packet)
Car 10 % of initial price
Gas(LPG Cooking ) 40 (per unit)

Let us take that he uses about 3 soaps per month, 1 tea per month, 1 hair
oil, 1 matchbox, 200 units of electricity, 30 liters of petrol per month, 10
processed items and a Gas cylinder.

This amounts to be about Rs 6+3+2+1+200*8+30*2+10*5+40= Rs 1822

So in one month, he spends about Rs 1822 extra in all these commodities.

In one year, he would spend about Rs 1822 *12= Rs 21864 as extra money
spent.

It is about two-fifths of Rs. 50208 which is the scheduled theoretical and

minimum income tax he has to pay.

If we consider that our assumptions are wrong by 50%, even then he will be
able to save

Rs 50208 - Rs 32796= Rs 17412.

In simple terms we can say that, he will definitely be able to save more
money if there is no compulsory income tax to be paid. Besides this figure,
savings can even be higher if he plans his life smartly and finds new ways to
create the income.

In short, we can safely conclude that in most of the cases like this one,
abolishing the Income Tax or reducing its value significantly will lead to
savings for a whole lot of people. More savings means more financial
security and thus bringing more relaxation to his mind.
In fact the benefits of removing of Income Taxes can be re-summed up as :

 If an individual knows that he doesn’t have to pay any Personal Income

Tax, then this will be a big moral boost for him. He can plan his
expenditure more effectively. Besides for elderly people, this may result
in improvement in health since a heavy burden has suddenly been lifted.

 If there is no Personal Income Tax, then people will not accumulate any
black money. This will greatly reduce corruption, black marketing and
hoarding.

 On an average, an individual’s throughput will improve since he doesn’t

have to worry about tax payment anymore. In order to earn more, he will
work more and this will have a positive effect on the economy.

As explained above, this will save his time which otherwise would have been
wasted in Government offices /Consultancy firms.

We also saw what might happen if the Income Tax is completely abolished
as:

 Some may argue that Indirect taxes should not be imposed on very
commonly used items such as sugar, oil etc.

 The proper definition of 'luxury' on which tax to be levied. This would

require an estimate of Standard of living for every citizen.

 The cost of land will suddenly be sky-rocketed because with increased

money in their hand, people will tend to buy more land for them.

Conclusion
Looking at above points, we can conclude that in order to open public
welfare places like hospitals, schools, roads, maintaining law and order,
opening and maintaining parks, disaster management etc the Government
needs some money from its citizens. As not all people are equally rich,
Government taxes us according to our income. We are charged “by our own
income” i.e. not the gifts and any other inheritance we come across. As
such, it is not totally unjustified that Government charges us some tax.

Besides it seems somewhat confusing that we pay for some tax even in
buying a soap. A 10 Rs soap charges us about 60 paisa tax although it is
included in the price of the soap itself.

All this is true in “paper”. In reality, a common man suffers not from tax but
from the “corruption” and the slow process of filing for returns and paying
the taxes. This has led to many people hiding money by not depositing them
in the bank and by not declaring it to the Government.

Looking at the above discussions, we can conclude that in general, a layman

will be very much benefitted by the abolition of the income tax. His overall
efficiency will be improved.

Besides, it will also not promote the Black Marketing/Hoarding which is done
just in order to evade the Income Tax. As such, it offers more benefits than
actually paying the Income Tax which can very likely be used for in the
name of public healthcare and other basic facilities.

Acknowledgement
In the end, we would like to thank Prof. M Satyam who guided us all along
the project in spite of him not technically belonging to this field. His
experiences on this topic proved invaluable to us as without them we might
have not been able to think along the same lines as a common man does.

During this study, we found that the time being spent on research in this
topic is not a wastage but rather a good learning experience. It is in fact an
insight into a vast topic that most of the people cannot understand in spite
of being a victim of the problem. We got a chance to analyze t he problem
and also tried to find out a solution.