Now’s the Time to Simplify Tax Code for the Salaried Class

Simplification of the tax code will help in getting rid of daunting steps one has to follow while filing returns.

Finance Minister Arun Jaitley will be presenting his fifth Budget under Prime Minister Narendra Modi on 1 February. While it is essential to streamline the procedures in order to attract investments, simplification of the tax code is necessary too. Even the Bharatiya Janata Party’s manifesto in 2014 had listed “rationalisation and simplification of the tax regime – which is currently repulsive for honest tax payers” as one of its priorities.

In the 2015 Budget, Jaitley had announced his intentions to rationalise the tax exemptions for corporates and lay out a roadmap for lowering tax from 30 percent to 25 percent in the next four years. Recently, the government has announced formation of an eight-member committee to redraft the direct tax law.

The United Progressive Alliance (UPA) government had also undertaken the task of rewriting 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 the government on this issue.

Exemptions for Salaried Professionals

Individuals account for 93.5 percent of the total returns filed, 63.2 percent of the aggregate gross total income showed in these returns and 34.2 percent of total tax liability, as per the income tax statistics of the assessment year 2015-16. Income from salary is the biggest chunk and represents 54.8 percent of the 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, such as 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 at, or why exemption is granted only twice in four years and 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 recognised political party, etc. The limit for claiming deduction for housing loan interest is Rs 2 lakh and investments is Rs 1.5 lakh.

Different Ways to Avail Tax Deductions

All 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.

At the beginning of a financial year, employers ask their employees to declare their expected tax deductions in advance, on the basis of which the Finance Department calculates the yearly net income and one gets net take-home salary. Several companies have dedicated teams for payroll. Some of them have outsourced it to other specialist companies. Software and programs are available in the market which can help an individual calculate their net take-home amount.

This is not all. Before the end of the financial year, employers again ask employees for the 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. This is followed by calling customer care, visiting bank branches, and gathering medical receipts and rent receipts from the landlord if one is claiming house rent deduction.

Sometimes, things don’t arrive on time before the deadline in office. If one doesn’t have bills, some people forge signatures of the landlord and go to medical shops to get fake bills. I have also heard of investments being proclaimed and stop cheque instructions issued later. All this is done to get the same monthly take-home else personal budget for the month of February and March goes haywire.

Utility of Flat Tax Rate

Submission of bills is followed by a headache for the finance team at your respective workplace. Are your bills genuine? Do they match with the declaration made, else the accounts team will have to calculate the take-home amount all over again.

In case of medical bills, one makes sure that the amount pertains to medicines and not some cosmetics that have been squeezed in. Different offices have different levels of scrutiny. If deadlines are missed then one may have follow-up for 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 one will get in hand (take-home salary). For example, if you earn Rs 40 lakh per annum and after exemptions/deductions, your tax incidence is Rs 10 lakh, your net salary is Rs 30 lakh per annum or, in other words, Rs 2.5 lakh per month.

You are interested in getting Rs 2.5 lakh per month while the government is interested in getting Rs 10 lakh as tax. This can be achieved even without 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 repercussions for certain individuals with some having to pay slightly more than others but then, tax slabs that don’t match pace with one’s current tax liability but will be helpful in the long-run.

If the government puts tax slabs of Rs 2.5-5 lakhs at 10 percent, Rs 5-10 lakh at 20 percent and more than Rs 10 lakh at 30 percent, one can be assured of an amount of Rs 10.25 lakh from the person in the example above. Different permutations and combinations could be tried so that both the government as well as employees don’t suffer much.

Give Breather to the Salaried Class

Life will be so simple with a definite salary figure, no deductions and exemptions, a slab-wise tax rate that allows everybody to calculate their tax liability and net take-home amount easily.

You could continue to have different tax rates for women, senior citizens and the disabled. Thousands of man hours won’t be wasted and this could be used for other productive purposes.

Some income tax officers would be free to do other important tasks like tracking tax evaders, unearthing domestic black money etc.

Critics would say this would reduce investments by individuals, that they won’t save and so on.

Will someone try to curb his medical expenses since he won’t be granted exemption? No.

Will people stop buying houses if they don’t get housing interest exemption? Answer is again ‘No’.

Will people stop investing if there’s no Sec 80C? Some would.

But this is not expected to have any adverse effect on the economy. So its time to make life simpler for all the salaried 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, they 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.

(Amitabh Tiwari is an ex corporate and investment banker turned political strategist, consultant and commentator. He can be reached @politicalbaaba. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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