Narendra Modi govt should spare a thought for salaried class; jump from 5% to 20% tax is grossest injustice to middle income group

Apart from being unjust to the middle class, it is the steep rate of tax that tantalises people to split their income

S Murlidharan May 30, 2019 09:28:19 IST
Narendra Modi govt should spare a thought for salaried class; jump from 5% to 20% tax is grossest injustice to middle income group
  • Apart from being unjust to the middle class, it is the steep rate of tax that tantalises people to split their income

  • If estate duty stages a comeback and wealth tax, too, is reintroduced as it should be, the direct taxes regime would become just and comprehensive

  • Sweden, often cited as the most progressive tax regime in the OECD, maintains a top statutory income tax rate of 57.1 percent.

Prime Minister Narendra Modi must spare a thought for the middle class too, particularly the salaried class. While sparing those earning not more than Rs 5 lakh from the tax net completely (as done in the interim Budget 2019) is indeed laudable, clobbering them with a 20 percent tax the moment they cross the Rubicon is grossly unfair.

To wit, let us say an executive has a taxable total income of Rs 10 lakh, all derived from her salary. Her tax liability is as follows: On the first Rs 5 lakh, it is Rs 12,500, i.e. 5 percent of Rs 2,50,000 with the first Rs 2,50,000 being exempt from tax secularly even if s/he is a crorepati. But the second Rs 5 lakh attracts Rs 1,00,000 by way of tax. This is the steepest jump in tax.

Corporate lobbyists are pleading for reduction of tax from 30 percent to 25 percent but no one is speaking up for the voiceless middle class. The salaried class is bilked at present. And a standard deduction of Rs 50,000 in lieu of exemption to transport allowance and medical reimbursement adds insult to injury.

The new Finance Minister must bring sanity to taxation by subjecting the second Rs 5 lakh, i.e. total income between Rs 5 lakh to Rs 10 lakh to a 10 percent tax. Income between Rs 10 lakh to Rs 15 lakh must get taxed at 15 percent and between Rs 15 to Rs 20 at 20 percent and so on till the maximum marginal rate of 40 percent is reached. In other words, the slab rates must jump 5 percentage points at each inflection point, i.e. at multiples of Rs 5 lakh. And there is nothing wrong in taxing the superrich at 40 percent transparently as against the existing surcharge regime.

Sweden, often cited as the most progressive tax regime in the OECD, maintains a top statutory income tax rate of 57.1 percent.

Narendra Modi govt should spare a thought for salaried class jump from 5 to 20 tax is grossest injustice to middle income group

Prime Minister Narendra Modi . File photo. Pic courtesy: News18

Apart from being unjust to the middle class, it is the steep rate of tax that tantalises people to split their income. A businessman with Rs 10 lakh as income would be tempted to divide the income between two taxable individual units so that neither of them pays any tax in the AY 20-21. On the other hand, a poor salaried person has to sulk and pay a whopping Rs 1,12,500 as mentioned above.

Lest economists and administrators complain that this tweaking of tax rates would result in loss of revenue, the new finance minister must also tax share market gains at par with other income. As it is, short-term capital gains earned through bourses get away with a flat rate of 15 percent and long-term at 10 percent after enjoying Rs 1 lakh exemption secularly. This would result in virtual confetti for the exchequer given a vibrant stock exchange that India boasts of.

Why should tycoons and company promoters be let-off with a slap on their wrists which a soft and flat 15 percent plus dividend distribution tax (DDT) implies? The dividend should be taxed in the hands of the recipients. Period.

The DDT, by shifting the onus onto companies, might have resulted in better tax compliance on this score but has willy-nilly resulted in pampering an income that ought to be taxed like any other, if not more stiffly.

And if estate duty stages a comeback as is expected and wealth tax, too, is reintroduced as it should be, the direct taxes regime would become just and comprehensive. All advanced or advancing countries have as hallmark a hard direct taxes regime and a soft indirect taxes regime.

(The writer is a senior columnist and tweets @smurlidharan)

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