i Talk about Income Tax

Boosting White Economy By Reducing Income Tax Rates

People don't report their income correctly because of high income tax rates. They failed to find any satisfactory justification to pay income tax honestly. People do hard work to earn money and what Government Of India (GOI) do? They steal one third of people's income in the name of income tax, plus more money using indirect tax methods. So most of the time, people looses approx 50% of their hard earned income to Government. People see this as daylight robbery; so try to save their money whenever they can.

Before talking about how reducing income tax rates can increase income tax compliance and boost white economy, lets see 2 (two) examples first.


One young businessman earns all his income from white source and he pays income tax honestly. Now he wants to buy a home. He select one flat and visit builder to discuss payments. Builder ask for Rs. 10,00,000/- payment in cash (black money) to save 30% income tax on it, which is Rs. 3,00,000/-

Now the young person thinks that, if he had to pay that Rs. 10,00,000/- as white money then he had to show that income and pay 30% tax on it, which is 3,00,000/- So actually he needed to spend Rs. 13,00,000/- (10Lac to Builder and 3Lac to GOI) total. But if he turn Rs. 10,00,000/- into black money and pay it to the builder then he actually save Rs. 3,00,000/-.

So this is a good deal that saves Rs. 3,00,000/- for both the businessman and the builder. Win win situation :)

Only Government is a looser!

Here white money turned into black money by the businessman. Once money goes out of white economy and entered into black economy, it keeps changing hands again and again and again. The cash keeps moving into black economy, and with almost each & every black money transaction, Government looses some tax income.


One traffic policeman who takes bribe, has some white and black money to invest. So he visits builder. Builder ask for Rs. 10,00,000/- payment in cash (black money) to save 30% tax on it. The traffic policeman is happy to accept builders demand.

Here both parties are happy - builder is happy to save 30% income tax and traffic policeman can invest his black money and earn some return in form of rental income and/or capital appriciation of real estate.

Again, only Government is a looser!

Here one point is to noted that when the traffic policeman takes bribe then he gets some part of it from black economy and another from white economy. So at least some part of the bribe income pulls money out of white economy. And as I said earlier, with almost each & every black money transaction, Government looses some tax income.

Effect and Solution

To understand the effect of money that comes out of white economy and gets into black economy, lets hypothetically do some calculation:

White Money Turned into Black = Rs. 10,00,000 + Rs. 10,00,000 (2 examples) = Rs. 20,00,000

This black money changed hands in one year = 12 taxable transactions.

So Tax Loss in one year = (30% of 20,00,000) x 12 = Rs 72,00,000/year.

Hence, GOI makes Rs. 72,00,000 loss per year because Rs. 20,00,000 goes out of white economy. Why does this happen? Just because builder don't want to pay more income tax as he consider high income tax rates as daylight robbery.

In above examples, the businessman & builder are 'Legal Black Money' maker; and the traffic policeman is a 'Illegal Black Money' maker. If you don't get these terms, please read 'Understanding Legal and Illegal Black Money'.

Now if Government cut down the income tax rates to half (50% less) and make 'income tax payment' more attractive then instead of making Rs. 72,00,000 per year loss on tax income, GOI can earn Rs. 36,00,000 (50% due to low tax rate) income per year.

Now someone may argue that it will also reduce current tax income by 50%, so it's not a good solution.

Yes, I agree that it will reduce current tax income but India's black economy is much bigger than white economy. Reducing income tax rates will not only stop outgoing money from white economy but also bring money to white economy from black economy. Let me show you how.

Take Example_A. Here if builder accept white money then the money won't exit from white economy as the businessman don't see any need to do so.

Now take Example_B. Here the traffic policeman has black income. But if builder insist for white money, the policeman will try to turn his black money into white; so he can make the payment. Hence money will goes out of black economy and comes into white economy.

This way reducing income tax rates will further boost white economy and increase tax income. Additionally boosting white economy will generate more income in form of increased indirect tax income.

Let's see little calculations:

In India less than 4% people pay income tax. Let's inflate it little further and say that we have 20% white economy and 80% black economy.

Let's say Rs. 100 is size of our total economy. Hence Rs. 20 are in white economy and Rs. 80 in black economy.

It means GOI earns Rs. 6.00 as tax income with current 30% rates.

If Government cuts down the income tax rates to 15%. It may boost the white economy to 50% (or more) i.e. Rs. 50. Now GOI will earn Rs. 7.50 as tax income.

This way GOI will earn more money. People will be more happy and supportive. Here Government and People both are winners!

What Should Be The Income Tax Rates?

As low as possible. IMO, 10% income tax rate for Business and 5% income tax for an Individual. But it won't be practical to jump on those rates directly. Government should implement my suggested 'Fair And Equal Income Tax Rates' first and then keeps slowly reducing it further.

Is It (Solution) Real?

Will reducing income tax, makes people really willing to report their income correctly? May be or may be not :) It depends upon the way you implement it. The government needs to make 'income tax payment' attractive by not only cutting income tax rates but also taking other steps.


Read my next article "Don't Push; Attract People To Pay Income Tax" to know how.

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