Time has come for rationalization & simplification of tax code for individuals

Arun Jaitley will be presenting his 5th budget under Narendra Modi on 1st of February 2018. While it is essential to streamline procedures to attract investments, cleaning up and simplification of the tax code is necessary as well. Even the BJP manifesto of 2014 listed “rationalization and simplification of the tax regime – which is currently repulsive for honest tax payers” as one of its priorities. In 2015 budget, Finance Minister Jaitley announced his intentions to rationalize the tax exemptions for corporates and laid out a roadmap for lowering tax from 30% to 25% in the next four years. Recently government has announced formation of an eight member committee to re-draft the direct tax law. The UPA government had also undertaken a re-write of the I-T Act and had also finalised the Direct Taxes Code. However, the Bill which was introduced in Parliament in 2010 lapsed with the dissolution of the 15th Lok Sabha, highlighting the non-serious attitude of government in this matter.

Individuals account for 93.5% of total returns filed, 63.2% of the aggregate gross total income showed in these returns and 34.2% of total tax liability as per income tax statistics of assessment year 2015-16. Income from salary is the biggest chunk and represents 54.8% of total income of individuals. Hence I take the example of salaried individuals to bring home my point.

As a salaried individual one enjoys a host of exemptions while calculating income from salary, transport  allowance (Rs. 1,600 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. Don’t ask me what’s the logic of Rs. 1,600 / Rs. 15,000, how they were arrived, why exemption only twice in four years and why not every year. From this income, one gets 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. The limit for claiming deduction for housing loan interest is Rs. 2 lakhs and investments is Rs. 1.5 lakhs.

All of these provisions are covered under various sections, have many conditions / clauses, caps, different caps for metros, different caps for senior citizens etc. making it pretty 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 software and 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, 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 and get rent receipts from your landlord if you claim house rent deduction. Sometimes things don’t come in time before the office deadline. If one doesn’t have bills, some people forge signatures of landlord and go to medical shops to get fake bills. Have also heard of investments made and later stop cheque instructions issued. All this to get the same monthly take home else the individual budget of February and March gets haywire.

After you have submitted the bills, its 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 case of 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.

Such a criminal wastage of time, money and effort. So many man hours expended on such a trivial matter. Who is bothered about these deductions? In the end the salaried class wants to know how much he gets in hand (take home salary). For example, if you earn Rs. 40 lakhs per annum and after exemptions / deductions, your tax incidence is Rs. 10 lakhs, your net salary is Rs. 30 lakhs per annum, Rs. 2.5 lakhs per month. You are interested in getting 2.5 lakhs per month, government is interested in getting 10 lakhs as income tax from your income. This can both be achieved without having all these tax codes and hundreds of clauses. So, no exemptions / deductions and just a flat tax rate and income slabs 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 tax slabs of Rs. 2.5-5 lakhs – 10%, Rs. 5-10 lakhs – 20% and >Rs. 10 lakhs – 30%, it would earn a similar amount of Rs. 10.25 lakhs from the person in example above. Different permutation and 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 tracking tax evaders, unearthing domestic black money etc. Critics would say this would reduce investments by individuals, they won’t save and so on. 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 is not expected to have any major adverse effect on the economy. So it’s time to make life simple for all salaried and individual tax payers.

To sum up, the logic 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 won’t care about this parity, it would be more than happy if they get same monthly take home without a host of deductions and exemptions, as it makes life much simpler.

(This article was first published in TheQuint.)





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