This Article is From Jun 27, 2014

Budget 2014: Why Arun Jaitley Should Cut Income Tax

Budget 2014: Why Arun Jaitley Should Cut Income Tax

In the run-up to the elections, a part of the BJP leadership spearheaded by current Transport Minister Nitin Gadkari talked about a revolutionary income tax proposal that was touted as a gamer-changer by many in the party.

The proposal suggested abolishing income tax and replacing it with a bank transaction tax to boost the government's finances and ease tax burden on salaried individuals. That proposal met stiff resistance from senior BJP leaders like Arun Jaitley, who opposed the plan on grounds that the measure would have blurred the distinction between the rich and the poor. (Read the full story here)

Mr Jaitley is now the country's finance minister and in a month's time he would be delivering his first budget, which many hope would ease tax burden on the salaried class.

Here are the reasons why Mr Jaitley should rationalize income tax structure in India.

1) India's tax system is lopsided with an estimated 4 lakh people paying over 60 per cent of income tax collected in the country. Salaried Indians pay more income tax than high earners in US and China according to a survey. However, many millionaire farmers do not have to pay taxes as agricultural income is exempt from income tax. (Read the report here)

2) Many of the current tax provisions were formulated more than a decade ago and need to be upgraded. For example, the tax benefit on housing loan interest (for self-occupied property) has not changed since 2001 even though property prices have gone up by 2-3 times during the same period.

3) Persistent high inflation has ruined household budgets and impacted savings. Consumer price or retail inflation in India was at 8.59 per cent in April year-on-year after running near or above 10 per cent for almost two years through the end of 2013.

4) Tax laws in India continue to be complex and lead to many disputes. According to an Assocham survey of 3,000 assesses, the tax administration's sole aim remains maximization the collections from a small group of people. Tax policies and administration are opaque while the refund process is fraught with complications, the survey noted.

5) A cut in income tax will leave more disposable income in the hands of individuals. It will enhance the spending power and will help drive certain sections of the economy that are dependent on discretionary spend such as autos.

According to the Assocham survey, the government must consider the following five changes to rationalize taxes and provide relief to taxpayers in India, (Also read: KPMG's income tax expectations)

1) The government should increase income tax exemption limit (currently set at Rs 2 lakh) to factor in high inflation. This will lead to more disposable income in the hands of tax payers.

2) The government should raise the savings rebate (under section 80C) beyond Rs 1 lakh. The tax rebate schemes under Section 80C was introduced by the Finance Act 2005 and is considered to be grossly inadequate under the prevailing macroeconomic scenario. Raising this rebate will encourage domestic savings, which has come down from 25.2 per cent in 2009-10 to 21.9 per cent in 2012-13.

3) The limit of interest paid on home loans needs to be revised upwards from the current Rs 1.5 lakh. This would not only lead to lower tax burden, but also provide impetus to labour intensive housing sector.

4) Medical and education cost of at least Rs. 1 lakh per annum should be made tax exempt. The minimum threshold limit should be determined based on the number of dependents for an individual.

5) The limit on premium paid on medical insurance under section 80D was fixed in 1998-99 and must be revised as they have not kept pace with the changed ground realities. Currently, individuals can claim Rs 15,000 towards mediclaim payment, while for senior citizens the cap is Rs 20,000.

Mr Jaitley would be constrained by the fact that income tax accounts for over 20 per cent of the government's total tax revenue and any meaningful reduction in taxes, without widening the tax base, could put pressure on the government's fragile finance.

Mr Jaitley has just over a month to make up his mind.