Of this, 3.8%, less than 4%, accounted for 60% of personal tax collections. In 2018-19, only 3.8% of Indians aged 20 and above paid income tax, according to data from the income tax department. India continues to suffer from wide income disparities-the policy regime has focused on widening the taxpayer base and encouraging new taxpayers to start contributing to the exchequer. The new tax regime introduced in FY20, where taxpayers can opt for simple slab-based taxes without exemptions and deductions, is also a step in this direction. Wealth tax was abolished in 2015 for similar reasons. Estate tax was abolished in 1985 with marginal collections and high administration costs and inefficiencies in implementation. Specific design (tax rate and tax-free thresholds) along with other contextual reforms (social security schemes, direct benefit transfers) aimed at minimizing the impact of underlying income re-distribution determine the success of the reform.Ĭan such a system be successful in India with its wide income disparity, complex provisions governing exemptions, surcharges and cesses, tax-free agricultural incomes, interplay between direct and indirect tax regimes and different taxation rules for different types of income? We have tried estate tax and wealth tax in the past. Many countries in Eastern Europe (Estonia, Latvia, Lithuania and Romania, to name a few) and Russia have experimented with some form of flat taxation-a proportionate tax rate across income levels with high exemption thresholds, increased allowances and tax credits to offer relief at lower income levels.

Flat tax rate