Simplification of the Indian tax code for salaried class

Budget is round the corner. Arun Jaitley will be presenting his 2nd budget under Modi in end of February 2015. While various sections have their demands, wish list and expectations, perhaps it is also time to take a pause and deliberate whether we need so many sections under the Income Tax Act particularly with respect to income of individuals. Cleaning up and simplification of the tax code is as essential as streamlining procedures to attract investments.

 

The focus of the article here is simplification of tax laws for the salaried class. As a salaried individual you enjoy certain exemptions while calculating income from salary like conveyance allowance (Rs. 800 per month), house rent allowance (there are various rules for this), leave travel allowance (you can avail it twice in a block of four years), medical allowance (Rs. 15,000 per year) etc. On the top of this assuming you have no other income, you are entitled to a host of deductions. Don't ask me what's the logic of 800 / 15000, how they were arrived, why only twice in four years, why not every year etc,

 

Then you get deductions from this income – deductions for professional tax paid, premium for life insurance, provident fund contribution, payment of principal / interest on residential house, payment of children fees, payment of medical insurance premium, payment of interest on education loan, donations to charitable institutions, payment for treatment of specified diseases, donation to recognized political party etc. Deduction limit for housing loan interest is Rs. 1.5 lakhs and investments is Rs. 1 lakhs.

 

All of these have many conditions / clauses, caps, different caps for metros, different caps for senior citizens etc. So all of this is pretty exhaustive and complex.

 

Each year at the beginning of the financial year, employers ask their employees to declare their expected tax deductions in advance. Then on this basis the finance department calculates your yearly net income and you get a net take home salary. A lot of companies have dedicated teams for payroll. Some of them have outsourced it to other specialist companies. Many softwares / programs are available in the market which help you calculate the net take home amount.  

 

This is not all. Before the end of the financial year, employers again ask employees for proof of declarations made at the beginning of the year. So you scramble to make investments, call up friends where to invest so that you can get the same take home next month. Call for your investment certificates, medical bills, school fees receipts, interest certificate for your home loan etc. Call up customer care centers, visit bank branch, gather medical receipts. Sometimes things don't come in time before the office deadline. Get rent receipts from your landlord if you claim house rent deduction. 

 

After you have submitted the bills, it's headache time for your office finance team. Are your bills genuine? Do they match with declaration made, else again they have to re-calculate your take home amount. In medical bills, is it all pertaining to medicines, or you have squeezed in some cosmetics. Different offices have different levels of scrutiny. Sometimes you miss deadlines then you have to seek refund which takes ages to come. 

 

Hah, such a criminal wastage of time, money and effort. So many man hours expended on a trivial matter. Deductions are like giving something to you in your left pocket and then taking it back from your right pocket in the form of tax. Who is bothered about these deductions? In the end the salaried class wants to know how much he gets in hand. 

 

For example, you earn Rs. 40 lakhs per annum. After deductions your taxable income is Rs. 37.10 lakhs lakhs and let's say your tax incidence is Rs. 9.71 lakhs. Your net salary is Rs. 30 lakhs per annum, Rs. 2.52 lakhs per month. You are interested in getting 2.52 lakhs per month, government is interested in getting 9.71 lakhs as tax. This can both be achieved without  having all these tax codes and hundreds of deductions / clauses. So, no exemptions and only a flat tax rate can still achieve this. This may have some repercussions on certain individuals, some may end up paying slightly more, some slightly less as tax slabs can't be made to match exactly everybody's current tax liability but will be helpful in the long run. 

 

If govt. puts a tax slab of 0-10 lakhs 10%, 10-20 lakhs 20%, 20-30 lakhs 30%, >30 lakhs 40%, (without any deductions / exemptions) it would get 10 lakhs as income tax earning in this case (close to 9.71 lakhs in the above case). If it puts tax slab of 0-5 lakhs 10%, 5-10 lakhs 20% and >20 lakhs 30%, it would earn 10.5 lakhs. Different permutation / combination could be tried so that both govt. as well as employees don't suffer much.

 

Life will become so simple, a salary figure, no deductions and exemptions, a tax rate slab wise, everybody can easily calculate their tax liability and net take home amount. You could continue to have different tax rates for women, senior citizens and disabled. Thousands of man hours won't be wasted and this could be used for other productive purposes. Some income tax officers would get free to do other important stuff like un-earthing black money. 

 

Critics would say this would reduce investments by individuals, they won't save etc. Will anybody reduce his medical expense since he is not getting exemption, no. Will people stop buying houses if they don't get housing interest exemption, the answer is again no. Will people stop investing if no 80C, some would. But overall this would not have any major adverse effect on the economy. So it's time to make life simple for all salaried tax payers. 

 

How is it in other countries? Singapore and Hong Kong do have exemptions / deductions but fewer than India. China is as complex as India. 

 

The logic perhaps of giving deductions is to bring some sort of parity with corporates. Corporates can claim a host of expenses as deductible from their income before they pay any tax. Salaried class may not necessarily want this parity, it would be more than happy if people get same monthly take home with or without host of deductions / exemptions.

 

Politicalbaaba runs a popular blog on Indian politics and elections www.politicalbaaba.wordpress.com. It has been nominated by The Guardian as one of the online voices providing an alternative view of India and the general elections. author runs a blog author runs a blog www.politicalbaaba.wordpress.com. You can tweet @politicalbaaba.