Simplify Personal Income Tax - Suggestions for Budget 2021-22 -Part I
Rohit Kumar Parmar Free lance [1]
IES (Retd)
Former Senior Economic Adviser
Ministry of Consumer Affairs, Food and Public Distribution
A. Introduction
Hon’ble Finance Minister on 1st February 2020 in her budget speech for the financial year 2020-21, observed that
`…Further currently the Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. It is almost impossible for a tax payer to comply with the income-tax law without taking help from professionals…’
A snapshot of the paragraph is reproduced below:
The intent to simplify the Income tax regulation and the process of filing IT returns above, may be seen in the context of the Budget speech 1998-99, extracts as snapshots pasted below.
The SARAL form referred to therein and a write-up on the same is available at the link https://rohitkparmar.wixsite.com/site/post/filing-it-returns-now-a-less-taxing-exercise. If anything the structure of Income tax and the process of filing IT returns since 1998-99 have both become complicated.
The present discussion rich from the experience of filing of tax returns for Assessment Year 2020-21, makes some suggestions to simplify provisions, procedures, rules and the return forms (ITR 1) under the Income Tax law. These suggestions do not impact the tax revenue in any way, and so should be easier to accept. The suggestions would also simplify process and procedures so that there would be lesser resistance from the staff.
B. Suggestions to simplify the tax provisions:
The goal of an efficient tax system should be to maximise revenue, at least cost to different players – the tax collector, tax payer and the economy, which (the economy) slows down if the tax system is too regressive. A complicated tax system if regressive, makes compliance difficult and offers incentives to evade and avoid tax. Further, a system saddled with discretion, creates room for loss of revenue (evasion and avoidance) and is accompanied with rent seeking. Even in a computerised system of processing, errors creep in, that are difficult to detect, causing loss of revenue. Examples of this are shared in this discussion. Keeping the above in mind, some features of an efficient tax system could include:
i. low rates of taxation
ii. fewer tax slabs
iii. fewer and rationalised exemptions
iv. administrative ease of compliance through lesser provisions of discretion
v. some neutralisation for price increases, to ensure that real incomes are not eroded
vi. simplicity and transparency, including in compliance
vii. simple Return forms and process of filing of returns.
C.i Low Rates of Taxation
The raison d'être for discussing 1. peak rates of personal income tax; 2. increase in the rates of personal income tax during 2010-20; and 3. stability in the rates of personal income tax; as part of Low Rates of Taxation is that these categories individually and collectively impact demand for goods and services.
Low rates of taxation ensure adequate resources are available for demand of goods and services by households. Private demand in contrast to public demand, ensures efficient allocation of resources and the goods and services purchased/ sold are competitive. Less government to collect and distribute resources is a major contributor to an efficient economy.
The `Laffer Curve’ argument that `sometimes cutting tax rates can increase total tax revenue’, also supports low rates of taxation. Low rates of taxation ensure better compliance since they reduce the incentive for evasion and avoidance, and also encourage voluntary compliance. This (low rates of taxation and resultant benefits), also helps to avoid measures such as mandatory filing of income tax returns on arbitrary criteria like introduced as the seventh proviso under section 139 (1) of the Income Tax Act, which are listed below.
`…a)Individual has spent an amount or aggregate of amounts exceeding Rs 2 lakh for himself/herself or any other person for travel to a foreign country; b)Individual has deposited an amount or aggregate of amounts exceeding Rs 1 crore in one or more current accounts maintained with a bank or co-operative bank; c)Individual has paid electricity bill exceeding Rs 1 lakh in a single bill or on aggregate basis during the financial year;..’
The first criteria will need several rounds of clarification on what to include - amount on ticket, visa and other related expenses, travel insurance, hotel stay, food, purchase of foreign exchange, local sightseeing, etc. The set of clarifications is endless and also creates inequity. An example of inequity is cost of stay in a hotel vis-à-vis stay with a friend/relative/baby-sitting, since the latter groupings do not cost.
The third criteria is arbitrary because electricity tariffs (i.e. unit price P) are not uniform across India; nor is the demand (i.e. quantity consumed Q) for electricity, since climate across the country and in different seasons changes. Family size, age composition, etc., are also not the same. So an expenditure (P x Q) criteria is arbitrary. In the past also such mandatory filing was adopted on criteria like ownership of four wheel vehicle, foreign travel, house, telephone, in the budget of 1997-98, extracts pasted below.
Impact on demand due to volatility in the rates and so tax paid is a key reason as to why the exchequer should moderate the same and announce a long term fiscal/ tax policy specifying rates of personal income tax, including the slabs, for a period of say five years. Suitable indexation to a price index should also be done. Political parties should be encouraged to include such agenda in the election manifestos.
In a market that is transiting to demand based on EMIs and periodic payments for services (net and mobile connectivity, transport, insurance, social security contributions, etc.), uncertainty in the rates of personal income tax, especially if they are likely to increase, in the backdrop of high rates of inflation, especially food inflation, negligible social security, moderates demand for goods and services and so growth of the economy.
The need and relevance for a stable tax regime has increased in the present COVID crisis with demand being impacted due to several reasons like reduction of economic activity and job losses, which are unlikely to recover in the next few years.
The rates of personal taxation (personal income tax in the case of India) are compared in a separate paper (summarised in Annexure I). The comparison is with select countries of SAARC, BRICS, Hong Kong and Singapore. The inclusion of Hong Kong and Singapore is because they are relatively speaking, competitive economies. The essential findings of the same are listed below:
C.i.1 Peak rate of personal income tax
India at 42.74 per cent has the highest rate of Personal Income Tax, with the exception of China (at 45 per cent). The next highest being Pakistan (35 percent), which is 7.74 percentage points lower.
C.i.2 Increase in Personal Income Tax during 2010-20
The increase in the rates of Personal Income Tax during 2010-20, in India by 42 per cent has been the highest, with the exception of Pakistan. The percentage increase in Pakistan has been 75 per cent, but this increase was only last year i.e., 2020, after no increase during the preceding nine years. The next highest (excluding Pakistan at 75 percent) is Myanmar (25 percent), 17 percentage points lower than the increase in India.
C.i.3 Stability in rates of Personal Income Tax during 2010-20
The maximum period for which rates of Personal Income Tax in India have remained unchanged is 3 years. During 2010-20, there has been no decrease in the tax rates. This contrasts with stable rates (no change) in Brazil, Russia, China and Hong Kong.
Pakistan also had near stable rates (at 20 percent) for nine years, with a change only in 2020. Tax rates (at 20 percent) in Singapore were stable for 6 years from 2010 to 2015, and at 22 percent for 5 years from 2016 to 2020, a relatively marginal increase. In Sri Lanka, tax rates in 2020 are at the same level (24 percent ) as in 2013. However, the tax rates declined during 2016 (15 percent) and 2017 (16 percent), which would have been welcome by the tax payer.
To sum up, India has one of the highest rates of personal income tax with one exception; it also recorded the highest percentage increase in personal income tax during the 2010-2020 period, with one exception; it also has large number changes in the tax rates, with a stable tax rate for a maximum period of three years.
C.ii Fewer tax slabs
Presently, Personal Income Tax in India has three tax slabs (5, 20 and 30 percent excluding surcharge) with small intra-slab range. A cost benefit analysis needs to be done on continuing with the 5 per cent tax slab. In all probability, the cost of collection would be higher than the revenue received. If an alternate use of tax personnel is incorporated, they would be able to garner more revenue from the time devoted to this slab.
An alternate way to address the issue of tax slabs is by a rudimentary analysis of the data available from the Income Tax Return Statistics Assessment Year 2018-19 Version 1.1 October 2019 (https://www.incometaxindia.gov.in/Documents/Direct%20Tax%20Data/IT-Return-Statistics-Assessment-Year-2018-19.pdf), which offers the following findings.
a. Of the 5,87,13,458 income tax returns filed for the assessment year 2018-19 a total of 3,66,62,530 or 62.44 percent reported income of less than 5 lakhs and did not contribute to any revenue (income tax) to the government. Of the total income tax returns filed, a total of 2,78,03,793 or 47.35 percent are in the bracket 2.5 lakhs to 5 lakhs, the first slab and not contributing any revenue (income tax) to the government.
b. Of the Gross total income of Rs. 51,33,084 crores declared as income in the income tax returns filed for the assessment year 2018-19, around Rs. 11,44,466 crores or 22.29 per cent with incomes of less than Rs. 5 lakhs did not yield any revenue (income tax) to the government. Of the Gross total revenue, around Rs. 9,98,475 crores or 19.45 percent of the incomes are in the bracket Rs. 2.5 lakhs to Rs. 5 lakhs, the first slab and not contributing any revenue (income tax).
There is a strong possibility if employees of the government (Central, State and Local bodies), public sector (Central, State and Autonomous) and other government funded bodies are excluded, the number of personal income tax payers would be negligible. It appears that the Tax Information Net and other reporting/ income capturing systems are not bringing in additional assessees in the tax net, nor is there any significant increase in the average tax collected per assessee.
In a possible scenario (presently hypothetical and proposed), where the government decides that assessees with incomes less than Rs. 5 lakhs do not have to file income tax returns, since they do not pay any taxes, the government does not have to provide tax officials and tax filing infrastructure for 62.44 percent of the assesses and may be worth considering. It may also have some political returns.
In addition to the above, the first tax slab between 2.5 lakhs to 5 lakhs needs to be abolished.
There can be an exemption limit of income upto Rs. 10 lakhs. The revenue loss on this will be marginal and offset by savings in staff, infrastructure, time and effort, both to file income tax returns and administer them. This section of the assessees has been severely hit on account of a slowdown in the economy since 2016-17, and the recent Covid crisis. They do not have adequate social security and large number of them have overdue loans taken for construction of houses, education of children, purchase of transport, small/self-employed business/ profession, etc.
While there can be discussions on different threshold levels, it is felt that the first tax slab should be Rs. 10 -20 lakhs, with a tax rate of 10 percent, sans cess. The loss of cess will also be negligible and may be compensated for by saving time and cost of staff, infrastructure. There would also be a saving in effort, both to file and administer the tax.
The next tax slab should be Rs. 10-25 lakhs, with a tax rate of 20 percent, sans cess.
A tax slab higher than Rs. 25 lakhs should have a higher/highest rate of 30 percent. A higher rate is being suggested, since this group is able to bill large amounts of expenditure to business heads, which the lower slabs are unable to do, or are able to do to a lower percentage.
Instead of reducing the number of slabs and simplifying the associated tax rates, budget 2020-21 has introduced a new option of lower rates applicable with no exemptions. Extracts of the budget speech are pasted below.
Observing the table of the budget speech, suggests that there is no change for assessees in the below Rs. 5 lakh category and for assessees above Rs. 15 lakh category. It would help if the government is able to publish the number and proportion of assessee who have migrated to this option. This information may be available for 2021-22 (AY) and only in 2023, and will help to understand the utility of this alternate.
[1] Author has in posts on his website (https://rohitkparmar.wixsite.com/site), twitter (https://twitter.com/rohitkparmar?s=09), facebook (https://www.facebook.com/me/), linkedin (https://www.linkedin.com/in/rohit-kumar-parmar-841b4724) been writing on impact of Covid and can be reached at rohitkparmar@yahoo.com.
Starting 1992, the author has been writing on Direct Tax Reforms in `The Economic Times’. Some of these are available on his website.
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