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Time to Abolish Income-tax on Salaries?

It is a matter of hours before the next Union Budget is presented. And never has been there a better time to abolish income-tax on salaries once and for all. Despite all the propaganda, it has never resulted in any benefit for the poor. A controversial subject and one that would normally take a few thousand pages to be debated and discussed comprehensively, but this is a humble endeavour, within the scope of a blog article, to present a concise case to permanently abolish income-tax on the salaried employees and suggestions to recoup the losses. I also believe that it is only the present government which has the courage to introduce radical reforms, and there is no better time than now.

I would not like to burden the reader of this article with voluminous statistics and complicated graphs, based on data available in the public domain and yet, some facts need to be mentioned here. During a post-budget meet and interview, Finance Secretary Shri Hasmukh Adhia mentioned that “salaried employees are paying more tax than business people.” He also added that, “50 per cent of the 7 lakh companies which file I-T returns show zero or negative income.” Another insight comes from the fact that there is an almost equal number of salaried individuals and individual business taxpayers – yet the salaried individuals pay an average of Rs. 76,306 per person as income-tax whereas the individual business taxpayer paid an average of Rs. 25,753 per person. Weird, huh?

The reader should note that the salaried employee pays income-tax on his income whereas the business taxpayer pays income-tax on his profits after deducting all allowable business expenditure including depreciation on his car, computer, other moveable and immovable assets. This injustice has continued for years – not because it is fair – but due to the fact that whereas the business taxpayer has the scope to evade or manipulate his books of accounts, the salaried taxpayer faces the grim prospect of tax deduction at source. Be clear – individual income-tax is largely a tax on the middle class salary earner plus independent professionals and no other class. The poor don't pay any income tax – rightly so, and the rich (including the rich farmers) get a big chunk of their incomes from business, agriculture, dividends and capital gains - very little from salaries. It is an insult to call any section of the salaried class as ‘super rich’, whereas the ‘real rich’ get away scot free. For example (and I have several), do you think it is the salaried class purchasing all those high-end niche properties in various cities of India, grandly promoted by the big builders for the ‘elite’ and having a ticket price of Rs. 7.5 crores or more?

The case for abolishing income-tax on salaries is simple –

  1. it is unfair and continues year after year because the salaried class is an easy pick and are not a majority of the vote-bank;

  2. it creates huge paperwork and administration for both the individual as well as the tax authorities;

  3. it drives savings based on tax-efficiency and not for the real needs of the economy and the individuals;

  4. it suppresses consumption in a consumption-driven economy;

  5. it has created a myriad of tax deductions, exemptions and complications that can simply be wiped out entirely.

The question that would then arise is how does the government recoup the fiscal losses it would incur by doing away with income-tax on salaries? Let us examine that in a simple fashion – the numbers given below are a close approximation or estimate, in the absence of my having an insight into the actual numbers in various government departments and commercial institutions.

Approximately 2 crore salaried individuals file their returns, of which the taxpayers number about 50 million and out of these, only 1 per cent or 500,000 pay the bulk of the taxes. We have also conservatively assumed that only 500,000 cars in India are sold/re-sold with a ticket price of Rs. 25 lakhs or more. For the sake of this article, we have also assumed that only 500,000 properties in India are sold/re-sold with a ticket price of Rs. 2.5 crores or more, with an average cost of Rs. 5 crores. Now let us look at the math.

Total income-tax collected from salaried individuals is estimated to be around Rs. 150,000 crore. Rs. 50,000 crore or 1/3rd of this can be easily recouped by doing away with fuel subsidies altogether – this is most certainly not a benefit derived only by the salaried class. The LPG and Kerosene subsidies for the poor can continue. Another Rs. 50,000 crore or 1/3rd can be easily recouped by levying a 2% cess on purchase of all ‘super-rich’ properties – if one considers an average ticket size of Rs. 5 crores and about 500,000 sales/re-sales in India. We are now left with only 1/3rd to recoup. Another Rs. 50,000 crores. Of this Rs. 10,000 crore each will come in from the increased GST collection (presuming the salaried class only spend a portion of the tax saved) and another from levying a cess of 1% on all cars which are priced above Rs. 25 lakhs. There are many other expenses that can be considered based on their ticket size, which are indeed only purchased by the ‘real rich’.

The balance savings, if still required, will come from savings in tax administration, and the ability to now focus on the tax evaders rather than salaried tax payers. By the way, this is also the time that more money can be channelized into the NPS by the salaried individual, who is often left with meagre resourced upon retirement and is dependent on his children. A part of the savings can also be channelized to social causes (Individual Social Responsibility in addition to Corporate Social Responsibility), through NGOs which work towards the poor and destitute and focus on education, child care and women’s issues.

Not only would the honest taxpayers actually be rewarded, but the money they save can be more effectively channelled to the right causes.

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