Consider a salaried person making more than ₹12 lakh a year. The government taxes their income before it reaches their bank account, and then, whenever they spend that money, they pay GST, excise tax, and multiple applicable cesses. Even gifting one’s own money or property could attract a large tax bill. What if everyone kept their incomes without the income tax and paid taxes only when they spend money?
It sounds like the sort of promise made before an election, designed to make an unpopular policy sound painless. A serious economic argument, however, does exist. Put simply, income tax takes a portion of what people earn. Abolish it, the argument goes, and people would have more reason to save, invest and declare their earnings. The economy could grow faster, and the government might replace the lost revenue with other taxes. At the heart of this idea lies something we often overlook about taxation: people respond to it. A tax does not merely determine how much the government collects. It also influences how people use the money they earn.
Indian economist and former BJP MP Subramanian Swamy, a staunch supporter of the abolitionist cause, has long advocated this view. His case rests on the belief that abolishing the tax would encourage savings and investment, and that the resulting growth in economic activity would generate enough indirect tax revenue to offset the loss.
In a 2002 interview, Swamy quantified this proposition. He estimated that abolishing income tax would cost the government ₹20,000 crore in revenue, but argued that the resulting increase in indirect tax collections could reach ₹40,000 crore. He argued that a larger share of household earnings would remain available for saving and investment, channelling more domestic capital into businesses and the stock market. These numbers belong to a different era; the central government’s 2026-27 budget estimates income tax receipts at 14.66 lakh crore.
Yet the argument extends beyond any one politician. It challenges a more fundamental assumption, one that has underpinned state funding for decades: that taxing income is necessarily the most effective way for the state to raise revenue. We do not need to look far for an answer, for India offers an interesting case study. In 2019, the government reduced the corporate tax rate for eligible domestic companies from 30 per cent to 25 per cent. Did businesses put the money they saved towards investment?
Adam Hussain, in a 2023 study published by the National Institute of Public Finance and Policy, examined manufacturing firms over the period and found a significant increase in investment following the tax cut, of about 3.1 to 6.7%. The effect was particularly pronounced among larger firms. In other words, the tax reduction translated into greater private investment, at least among the firms studied. This was a tax on companies, not individuals, but the example shows that taxpayers do respond to tax changes. Now consider this logic in the context of black money. In 1997, the government substantially reduced personal income-tax rates and introduced a scheme allowing people to declare previously concealed wealth at a lower tax burden, with penalties and interest waived. The response was striking. Over 4.6 lakh people came forward, declaring over ₹33,300 crore in previously undisclosed income. An IMF assessment found that much of this wealth was held in assets, particularly gold. India’s own White Paper on Black Money later identified high tax rates as a major incentive to conceal income, arguing that lowering them could improve voluntary compliance.
An amnesty alone is not sufficient to make a case for abolishing income tax. A considerable amount of wealth remains concealed in gold or parked in property and, when brought into the formal economy, becomes available for more productive use. The question is how much more removing the tax altogether could unlock. While drastic changes to the tax code could be daunting to implement because of revenue uncertainty, a sensible start would freeze the current tax structure and gradually lower it over time, eventually ending the government’s reliance on direct taxes and replacing the lost revenue with indirect taxes.
Perhaps the real measure of a tax system is not simply what it collects, but what it prevents from ever being created. Every rupee concealed, every investment deferred, every business never built carries a cost that rarely appears in account books. For too long, we have asked how much wealth the state can claim; it is now time to ask whether the state should tax incomes in the first place.
About the Author:
Joel Saji is a high school student interested in computer science, economics, public policy, and development. He is a Writing and Research Intern at the Centre for Civil Society through its mentorship programme with Shri Ram College of Commerce and co-founded The Knowledge Corps, a student-led nonprofit focused on community engagement and social impact.