Successive finance ministers have made right noises about widening the tax base, alluding to the reality that businessmen and professionals by and large thumb their noses at the taxman.
The proposed GST regime, to be sure, can improve the direct tax compliance riding piggyback on the copious trader data mined from out of the GST supply chain but then all depends upon how successfully the government at the centre steers clear of succumbing to the pressure applied by states in carving out exemption from the GST regime for small traders.
Ideally, there should be no exemption but only zero rating for small traders so that nobody escapes the audit trail on the self-serving alibi of smallness. The truth is only a watertight GST regime can garner both indirect and direct tax revenues for the government.
Apart from tax evaders some of whom might willy-nilly come under the proposed GST pincer, there is another problem unique to income tax collection from businessmen -- considerable latitude available in booking expenses for which sky is the limit.
In fact, indispensable company executives pine for and get to wear the consultant’s hat enamoured more by the enormous scope offered by the latter for creative tax planning. What was hitherto expended on him by the company by way of cost to the company (CST) is asked to be paid by way of fees.
The company’s tax fortunes are not affected by this change in the name tag but the former executive’s tax liability is going to change dramatically what with he now contriving to pay salary to his own senior citizen parents (enjoying generous tax exemptions) and cleverly converting bulk of the personal expenses into business and more.
A salaried person, on the other hand, is condemned to paying heavy taxes with very limited scope for making tax-oriented savings and investments.
That is why the salaried class is piqued each time finance ministers bracket it with others including businessmen -- the hike of tax exemption limit from Rs 2 lakh to Rs 2.50 lakh enured for everyone last year. The hike in section 80C savings limit from Rs 1 to Rs 1.5 lac enured for everyone last year. The hike in interest limit on self-occupied residential property from Rs 1.5 lac to Rs 2 lac enured for everyone last year.
The only unique regime that obtained exclusively for the salaried class was standard deduction that too given grudgingly -- one-third of salary or Rs 30,000 whichever was less -- whereas there is no limit on any expenditure for a businessman, be it on entertainment, travel or conveyance. Nobody is asking for hurtling back regressively into the old regime of dirigisme were expenses were subject to a cap but in all fairness the salaried class should not be looked upon by the taxman as a sitting duck.
Modi when on the campaign trail promised the salaried class refund of some of the taxes paid by it in the past from out of the loot retrieved from Swiss bank accounts but that seems to be in the realm of wild speculation with the dice heavily loaded against the wistfully expectant salaried class.
What he and Jaitley can do is to rework the slabs for salary. Just as there are special rates for short-term capital gains from the bourses, there must be a separate slab rate for computing tax on the salary income -- half the normal rates.
Thus the first slab would be 5% as against 10% normally, the second 10% as against 20% normally and 15% as against 30% normally. This would be a poetic justice for them and redress their long standing grievance that in the absence of elbow room they end up paying huge taxes, leaving a relatively small disposable income.
The tax-free limit of Rs 15,000 on non-hospital medical reimbursement fixed eons ago must be hiked by the same cost inflation index that enures for long term capital gain earners. Some of the tax exemptions like for House Rent Allowance are premised on major-minor city classification. Delhi, Mumbai, Kolkata and Chennai alone make the grade as major cities whereas cities like Bangalore, Hyderabad, Pune etc too have been vying for that status.
Employees living in the latter set of cities willy-nilly have to settle for lesser tax exemptions vis-à-vis those living in the four metros. The income-tax law indeed is caught in a time warp especially for the salaried class.
Updated Date: Feb 21, 2015 14:15:10 IST