Whether recommendations of Direct Tax Panel for taxing Individuals help India deal with job drought and reset priorities. Read on to find out.
By Kumarmanglam Vijay
The panel appointed by the Government in November 2017 to write new income tax legislation in consonance with the economic needs of the country has submitted its recommendations and draft income tax bill to the finance minister Nirmala Sitharaman this week. Panel’s report is expected to be put forward for public views in next few weeks. One of the big-ticket changes being contemplated is to provide significant tax relief to middle class and upper middle class i.e. those earning up to Rs. 50 lakh per annum. If that is indeed implemented, it would mark a major shift to recognize the changed economic realities and enable the country to prosper going forward.
A question arises as to whether in a country with stark income inequality, it suits the policy makers to leave more money in the hands of individuals rather than redistribute the same to the poorer section of the society as has been attempted in recent past under Ayushman Bharat Health insurance scheme where in health insurance up to Rs. 5 lakh per annum can be availed by needy and PM Kishan Scheme whereby all farmers are being extended Rs 6000 a year assistance.
It seems that present-day taxation scheme provides little relief for the real expenditure that the individuals in middle class are confronted with thereby forcing them to deal with uncertainties by themselves and explains a consistent migration of young workforce overseas. For a middle-income earner living in a metropolitan city and earning Rs.50 lakh a year with spouse being a homemaker, two children, ageing parents and obligations to pay EMIs towards house, car and insurance etc., income tax liability after claiming usual exemptions & deductions is approximately Rs. 12 lakh. After meeting regular expenses and providing for EMIs towards housing loan, car loan and insurances, school fees & medical bills, very little is left for saving towards reskilling oneself or for saving for post-retirement expenses.
In comparison, a similarly placed person working in Shanghai, China is required to pay tax of only Rs. 5 lakh as Chinese tax laws provide meaningful deduction towards the expenses incurred by the individual on education of children, reskilling self, interest on housing loan or rent and caring for elderly. It is important to note that these amounts are arrived at after ensuring that mandatory contribution towards pension, health insurance, unemployment, injury, maternity and housing fund are set aside. Due regard is also given to the cost of living at a particular place.
Unlike other developed economies, in India such an Individual is assured no benefits or assistance whatsoever to in case of death, serious illness, loss of employment or in old age in spite of regularly paying significant amount in taxes over the working life.
A few anomalies reflecting that present taxation scheme of individuals has little relevance in the current economic scenario are enlisted below:
- It is now increasingly evident that job drought cannot not be addressed by the large companies, but people ought to find means of becoming self-employed. a well-known fact that the Government is stressing upon helping people become self-employed instead of seeking jobs. However, deduction towards rent paid by a self-employed individual is capped at Rs. 5,000 per month without any regard to the place where such person resides to make a living. In contrast, a person employed with any concern and receiving house rent allowance is entitled to a meaningful deduction towards rent paid.
- Deduction towards payment of tuition fees of children which accounts for significant expenses for a family is clubbed within the overall deduction of Rs. 1.5 lakh in a year which is a common limit for other regular deductions such as Provident Fund, PPF, premium for life insurance etc.
- Barring taxation of house rent allowance, little regard is given to the difference in costs of living.
Present tax law is replete with such provisions that do not offer any meaningful relief to the individuals and seems misdirected in today’s scenario where people ought to be incentivised to be their own bosses.
As per data available on Government’s open data platform, in the year 2026 India will have overall population of 1399.8 million of which working population between the age group 18 to 59 years shall comprise 832.4 million. This means that the balance population of 567.4 million shall either be below 18 years or 60 years or above. It is hoped that the proposed recommendations and new Income Tax Bill would enable not only set fair rules for individuals irrespective of the manner in which they are employed but leave enough in their hands to shoulder responsibility towards elders and younger lot without compromising on their old age security. This therefore may be the key to enabling growth by empowering individuals and lead to higher economic activity.
(The author is partner, J Sagar Associates. Views expressed are personal)