Sobhan Kar, Bhubaneswar, 15 August 2024
Indian taxpayers deserve freedom from a complex Personal Income-tax (PIT) regime! They need a simple and straightforward regime that does not require numerous calculations and an understanding of exemptions, deductions, and rebates. For far too long, we have kept our common taxpayers on the fringes of responsible tax filing. Most just go through the motions on the advice of a chartered accountant, or a lawyer, or somebody who knows a little more about tax filings than them! There’s neither interest nor involvement on the part of taxpayers.
Today, we are in a peculiar situation where the Government has strung the taxpayers between two different PIT regimes. One is the old complex regime that is riddled with numerous calculations and requires some understanding of the various steps needed to be taken before determination of the total income and tax payable. The other is the new regime that was started a few years ago on the philosophy of simplicity and required no deductions to arrive at the total income. Since no deductions were available, low rates were prescribed. Tax slabs and tax rates vary significantly between the two regimes and create needless confusion in the minds of the ordinary taxpayers.
Surprisingly, within a short span of 3-4 years, the new regime has started straying off the path of simplicity with the introduction of deductions and rebates. This was uncalled for, as the Government had introduced it in the first place to foster simplicity. It is akin to taking two steps towards simplification and then moving a step backward towards the world of complexity!
Time has come to move away from this duality of regimes and embrace a single regime that is simple to understand, simple to comply with, and simple to administer. This would also foster financial and tax literacy and make our citizens proud taxpayers with a degree of involvement in the process hitherto not seen.
In a society like ours where social security is neither adequate nor universal, the importance of savings, insurance, and investments for a secure future is well understood. Tax concessions for such activities have been provided for decades. Similarly, donations to charities and payment of interest on educational loans have also been tax incentivised. All these are important but should not be promoted through tax incentives. Rather, we ought to leave people with adequate resources in their hands to make investments and donations out of choice. The Government should not act as the traffic police that directs vehicles in particular directions. Let the vehicle drivers choose the path they want to drive upon.
A simple PIT regime that leaves adequate resources in the hands of the taxpayers could begin with a basic exemption limit of Rs. Three lakhs per annum. This limit would be linked to the inflation rate and would be moved upwards yearly by an amount equivalent to the nearest Rs. Ten thousand. Senior citizens (aged 60 to 80 years) could have an exemption limit of Rs. Four lakhs and very senior citizens (above 80 years) could have an exemption limit of Rs. Five lakhs. The same inflation link would be available to these exemption limits too.
Since the goal is to do away with all deductions and also leave the taxpayers with adequate resources, a tax rate of 5% would be applied on all categories of individuals till an income of Rs. Ten lakhs. To boost savings and investments by citizens earning between Rs. Ten and twenty lakhs, a tax rate of only 15% would be levied. This would also provide such taxpayers with the fiscal headroom required to finance their children’s higher education. For incomes above Rs. Twenty lakhs, a tax rate of 25% would be levied to mop up resources and also enable the relatively richer people to donate to charities. All these tax brackets would be linked to inflation and upward revisions could be made every three years.
The above PIT regime would fulfill Adam Smith’s canons of simplicity, efficiency, and certainty with aplomb and leave the taxpayers with adequate resources in their hands. No deductions under the existing Chapter VIA would be available. Some rare exemptions and deductions under the different heads of income (like standard deduction for the salaried class and interest deduction on house property) would be available for an interim period of 3 years and would then be withdrawn. There could be some revenue loss in the initial years due to this liberal PIT regime but with no deductions and better compliance, revenues would soon start to soar.
The ultra rich, earning more than Rs. One crore, five crore, and ten crore, would be charged with a surcharge of 10%, 20% and 30%, respectively. This would mean that the highest tax rate for people earning in excess of Rs. Ten crore would be 32.5%. It is a reasonable maximum rate of taxation for someone having the ability to pay the tax.
That the taxpaying citizens of India would accept a simplified PIT regime is apparent from the statistics shared by the CBDT recently. This year’s return filing cycle for individuals ended on 31st July and a whopping 72% of the total returns filed (more than 7 crore) are under the new, simplified regime. Thus, people have chosen to embrace simplicity and shun complex calculations. This augurs well for ushering in an even simpler and a unified PIT regime, as advocated in this article.
