Simplify Personal Income Tax - suggestions for Budget 2021-22- Part III
Need to Index Income Tax Thresholds
Rohit Kumar Parmar Free lance [1]
IES (Retd)
This part of the discussion for Budget 2021-22, tries to examine the question -Does the group of income tax payers in India, who have been contributing to absolute increases and to increase in shares of tax revenues, deserve a better treatment? The obvious answer is Yes, with the hope that the Finance Minister also thinks so.
Income tax payers in India have been viewed as a group that evades and avoids taxes and, therefore, does not qualify for fair treatment. However, the (salaried) income tax payers are penalised for this perception. Income tax payers consist largely of salaried employees, who are subject to full tax deduction before they receive their salary. The (salaried) income tax payer does not have a choice (Hobson’s choice for the Economist) to evade or avoid tax on the salary.
The deduction of tax before payment of salary covers the full tax liability and is different from TDS, which is 10 percent in most cases. Assuming the same amount of tax is paid by a (salaried) income tax assessee vis-à-vis (non salaried) income tax assessee, the latter gets to use the amount and save interest to the extent of difference between his slab rate and 10 percent as TDS. The (salaried) income tax payer is also liable for any mismatch in the tax collected by his employer at any stage of his life.
The share of income tax in Gross tax revenues of the central government of India, increased by 4.23 percentage points from 18.50 percent in 2011-12 to 22.73 percent in 2018-19.[2] It is projected to further increase to 26.33 percent in 2020-21. This increasing trend of share of income tax, dates back at least to 1986-87, when from a low of 5.8 percent it increased by 3.4 percentage points to 9.2 per cent in 1996-97.
During the same/similar period, the share of excise, customs and others taxes in total tax revenues decreased. With 2011-12 as the base year and an index of 100, in 2018-19 against the increase in Personal Income Tax to 287. 55, increase in Corporate Income Tax at 205.56 was 81 percentage points lower.
The lower (significantly lower in some taxes) corresponding increases of other tax revenues drive home the point well- Gross Tax Revenues (233), Corporate Tax (205), Excise (159) and Customs (78). This suggests that the income tax payer is paying a relatively higher share of taxes vis-à-vis other sources of tax revenues. Earlier section also indicates that even in terms of other countries, tax rates are the highest in India.
Table 1 gives the increase in tax revenues from different sources -Personal Income Tax and Corporate Income tax as Direct taxes and Excise Duty, Service Tax and Customs as Indirect taxes.
Some of the features of changes in the Personal Income Tax in the table above are -
1. With 2011-12 as the base year and an index of 100, during 2018-19 Personal Income Tax recorded the highest increase to 287. 55, followed by Corporate Income Tax, 82 points lower at 205.56. This is 126 percentage points higher than the rate of inflation recorded by the Consumer Price Index (CPI). The Index of Personal Income Tax in 2020-21 is projected to increase to 387. 88, followed by Corporate Income Tax at 210.96, a significant 176 points lower.
2. Accordingly, the share of Personal Income Tax in Gross Total Revenues increased from 18.50 per cent in 2011-12 to 22.73 in 2018-19 and is projected to further increase to 26.33 per cent in 2020-21. All other sources of tax revenue are recording a decrease in their shares. Within personal income tax, the individual tax payer is contributing a larger share of taxes. The personal income tax payer is the milch cow of the exchequer as articulated in a budget speech 2013-14 extracts pasted below.
Increase in income tax revenues and it’s share has not come from a proportional increase in the number of total taxpayers, but by (individual) income tax payers paying a higher amount of tax per assessee, immiserizing them. Table 2
Individual income tax payer (as opposed to AOP (Association of Persons -Individual and Trust; Body of Individuals; Firm; Company; Government; Local Authority) have the largest share of income tax payers, which has marginally increased by around one percent from 94.17 percent in 2013-14 to 95.18 percent in 2018-19. Surely, the incremental registration of companies and other forms of business/economic activity does not appear to be translating into Income Tax payers.
A large part of the increase in share of Income Tax in Gross Tax Revenues is because income tax thresholds are not revised to neutralize inflation. While the growth in Income tax revenues has surpassed inflation, measured by the Consumer Price Index (CPI), there has been no indexation of the thresholds. Infact some of the thresholds have not changed during the period under reference.
The least relief that the income tax payers can expect, is to be neutralised against inflation for thresholds like basic exemption limit; limits of tax slabs; exempt income because of select investments; etc. Relief of higher thresholds could also be considered on a normative basis, which is not being discussed here.
A CPI based neutralisation as in the case of Capital Gains Tax is suggested. The need to neutralize for inflation has been mentioned in the budget speech 2013-14 extracts pasted below.
Tables 3 & 4 show the index as per adjusted CPI, compared to the increase/ index of the thresholds. Simple observation suggests large gaps in a CPI based neutralisation of thresholds.
To sum up there is a case for indexation of thresholds to neutralize the income tax payer against inflation.
[1] Author has in posts on his website (https://rohitkparmar.wixsite.com/site), linkedin (https://www.linkedin.com/in/rohit-kumar-parmar-841b4724), facebook (https://www.facebook.com/me/), twitter (https://twitter.com/rohitkparmar?s=09), been writing on Economics, Law, Consumer Affairs, Tax, 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. [2] Last year for which actual/ final data is available.
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