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Simplifying the Personal Income Tax Structure in India

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hemenvarma
hemenvarma
Hemendra Kishore Varma is an alumni of IIT, Kharagpur and IIM, Ahmedabad. Has close to 45 years of working experience of which the first 15 years were spent in the industry with Voltas G. Claridge, and finally with Jenson & Nicholson as GM – Manufacturing. In 1987, started his management consultancy activities in the areas of Operations Management, MIS and Organisation & Human Resources Development. Has a number of published articles in newspapers and journals like Economic Times, Financial Express, Business Standard, Indian Management, Indian Express, Management Review, Himmat, HRD Newsletter etc. Founded The 5S Institute in January 2005. This is India’s (and, indeed, the world’s) first institute dedicated to providing training and implementation assistance in 5S. Has conducted over 50 Certification Programmes and there are close to 1100 Certified 5S Practitioners in India, today.

These changes are suggested in the Income Tax Act with a view to greatly simplifying the Taxation and Tax Computation Structure.

There is no recommendation here to reduce the Income Tax rate.

Apart from the simplification it will result init will also mean a tremendous saving for the  Employers’ (Govt & Private Sector) and the IT Department  in the administrative costs of computing and determining Income Tax as well as  Salary Slip printing & stationery costs

My basic recommendation is thisScrap all Tax Free allowances  and compensate for the same by due adjustment of “initial tax exemption amount”  and “Tax Slab Adjustment

The major Allowances that currently qualify for Tax Exemptions (under various conditions and particularly for the salaried class) are :

Sl

No

Type of Allowance Normal Amounts for which Tax Exemption Claimed Annually Guesstimated Weighted Average of Exemption Claimed (Annually)
1. House Rent Allowance Rs. 60 K  to  Rs. 720K Rs. 300 K
2. Medical Allowance Rs. 15 K Rs. 15 K
3. Leave Travel Allowance Rs. 15 K  to  Rs. 100 K Rs. 40 K
4. Conveyance Allowance Rs. 9.6 K (Rs. 800 p.m.) Rs. 9.6 K
5. Food / Meal Allowance Rs. 10.5K (Rs. 875 p.m.) Rs. 10.5 K
6. Educ Allowance Rs. 2.4K (for 2 children) Rs. 2.4 K
TOTAL WEIGHTED AVERAGE of EXEMPTION CLAIMED ANNUALLY  

Rs. 377.5 K

 

Hence the recommendation is that if these allowances are withdrawn and cancelled for claiming tax exemption,  the tax payer must be compensated by a like amount,  which can be done by raising the present Tax Exemption Limit from Rs. 200 K  to Rs. 577.5 K.

Assuming that the guesstimated figure of Rs. 377.5 K  being claimed as exempt from Income Tax is correct,  the fact remains that this is essentially applicable for Salaried Persons.  Thus,  raising the Tax Exemption limit to the full extent of the above  “estimated Tax Exemption Loss”   will bestow an unintended tax reduction benefit  on all those who are not salaried persons.

Keeping the above in mind,  the following is recommended.

  1. Complete Withdrawal of Tax Exemptions under the above 6 heads.
  2. Compensate for the corresponding tax increase on the taxpayers as follows :

          a)  Raise Minimum Tax Exemption Limit for all tax payers from the current 250 K to Rs. 400 K (in                       case of   Senior Citizens, raise it from Rs. 250 K to Rs. 450 K and in case of Senior Citizens above 80 years,                     raise it from   Rs. 500 K to Rs. 600 K)

          b)  Introduce Standard Deduction for all salaried persons subject to a maximum of Rs. 100K

          c)  Raise the Income Slabs for 10 % and 20 % Income tax Rates as under :

  •        Change 10 % IT Rate Slab from the current Rs. 201 K – Rs. 500 K to  the revised Rs. 201 K – Rs. 800 K
  •        Change 20 % IT Rate Slab from the current Rs. 501 K – Rs. 1000 K  to  the revised  801K – Rs. 1500K

 

The rationale behind the above recommendations is as under :

  1. Compensate the tax payer for the withdrawal of various tax free allowances by raising the minimum tax exemption limit ; in doing so, it is true that some people who are not salaried persons will get a “bonanza’ because of the raising of this tax limit.
  2. To restrict such ‘bonanza” the minimum tax exemption limit raise has been restricted to Rs. 100 K only.
  3. However, to compensate the salaried tax payers who were availing this tax exemptions,  they are compensated by giving them a tax relief through the “standard deduction route”  which is applicable only  to salaried employees.
  4. Finally, the higher bracket salaried persons who are not fully compensated in the tax exemptions they used to enjoy under various allowances (which are proposed to be withdrawn now), the Slabs for 10 % and 20 %  IT rates are proposed to be widened so that they get compensatory relief there.

 

The above is intended to be a   purely as a revenue – neutral  but Income Tax Structure simplification measure,  which will have the following  concomitant benefits :

  1. Tax Computation and Tax determination will become far simpler and easier.
  1. Tax Structure of various organisations (government and private) can be drastically simplified by reducing the number of heads of payment, which were primarily introduced to take advantage of the various tax exemptions so far allowable under the Income Tax Act ; thus every salary structure can now have as much as 6 fewer  “heads of payment”  , HRA, Medical, LTA, Conveyance Allowance, Food Allowance and Education Allowance,  since having these heads will no longer reap any tax benefits.
  1. This also means that people will not have to fudge and manufacture documents for claiming tax benefits, particularly for the heads related to  HRA,  LTA  and  Medical.  To that extent, the IT department does not have to spend time & energy in “verifying”  that such claims are genuine or not,  which will mean a tremendous saving in administrative time spent and costs incurred for such  work in the IT Dept.

The figures mentioned above are purely based on the undersigned’s best estimates and are certainly not claimed to be accurate.  It is recommended that,  based on the information available with the IT department and the government,  these figures may be fine-tuned and the various figures adjusted to result in a revenue – neutral,   re-alignment of the Income Tax Structure.

Thereafter,  if the government wishes to give some tax relief to the tax payer, it may do so in addition to what is recommended above.

This is also in consonance with the spirit of the  Direct Tax Code (DTC)that is built on the very sensible premise of scrapping all exemptions and compensating for the resultant  “increased tax liability”  by a suitable tweaking of tax rates, tax slabs and minimum tax exemption limits.

PROPOSALS  RELATED  TO  INCREASING  DEPOSIT LIMITS  IN  SEC 80C AVENUES LIKE  PPF TO BENEFIT INDIVIDUAL TAX PAYERS AND AT THE SAME TIME GIVE CHEAPER FUNDS TO GOVERNMENT FOR DEVELOPMENTAL WORK

The basic Recommendation is  : Raise  the present exemption limit of  Sec 80C deposits from the current Rs. 1.50 lakhs  to  Rs. 25 lakhs  as under :

  1. 1.50 lakhs can be deposited in any of the currently available avenues like PF, PPF, LIC,FDs of 5 years tenure and longer etc.  (i.e. no change proposed)
  2. Deposits beyond Rs.1.50 lakhs upto Rs. 25 lakhs can only be made in PPF  under the following provisions :
  3. For deposits from Rs.1,50,001 upto Rs. 5,00,000/- the interest rate paid in PPF deposits will be 2 percentage points less than the declared PPF rate for that year (which is applicable to the deposit of the first Rs.1.50 lakhs)
  4. For deposits from Rs.5,00,001 upto Rs. 10,00,000/- the interest rate paid in PPF deposits will be 5 percentage points less than the declared PPF rate for that year (which is applicable to the deposit of first Rs.1.50 lakhs)
  5. For deposits from Rs.10,00,001 upto Rs. 25,00,000/- the interest rate paid in PPF deposits will be NIL.

As can be easily understood, the government will get a huge cache of cheap and almost NIL cost funds for the price of foregoing some taxable income (a fair part of which it was losing anyway because people may have been avoiding declaring the same to avoid / evade  paying income tax).

Even more important, the deposit of so much money in government coffers means that development works can be tremendously speeded up without the government running up huge deficits because these funds are coming at substantially lower costs.

Finally, the mopping of so much money from individuals will have a salutary effect on inflation that is fuelled by excess of money supply in individual hands.

 

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hemenvarma
hemenvarma
Hemendra Kishore Varma is an alumni of IIT, Kharagpur and IIM, Ahmedabad. Has close to 45 years of working experience of which the first 15 years were spent in the industry with Voltas G. Claridge, and finally with Jenson & Nicholson as GM – Manufacturing. In 1987, started his management consultancy activities in the areas of Operations Management, MIS and Organisation & Human Resources Development. Has a number of published articles in newspapers and journals like Economic Times, Financial Express, Business Standard, Indian Management, Indian Express, Management Review, Himmat, HRD Newsletter etc. Founded The 5S Institute in January 2005. This is India’s (and, indeed, the world’s) first institute dedicated to providing training and implementation assistance in 5S. Has conducted over 50 Certification Programmes and there are close to 1100 Certified 5S Practitioners in India, today.
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