INCOME TAX REFORMS NEEDED FOR SALARIED CLASS

In less than a fortnight, the Finance Minister will present the Union budget 2008. Thanks to a robust growth in tax collection in 2007-08, citizens of India are expecting that individual tax rates will be reduced and surcharge, education cess will be revoked. However such retractions in isolation may not help the common man much. India today is in an enviable position, being the third largest economic power after the US and China. Though inflation has been kept in check in 2007, it has risen in the last few weeks. Indian rupee appreciated against dollar due to a steady increase in foreign exchange reserve.  A looming possibility of a major recession in US is being predicted and the cumulative effect of these could be a higher inflation in the coming year. Though a reduction in individual tax rates would be appreciated, to augment his savings the salaried personnel would require some more fiscal favours. On this back ground it would be prudent to analyse what can the salaried class wish from the budget.

Realign tax slabs

One of the requirements of the day is realignment of tax slabs. Currently minimum income threshold for an individual after which the maximum marginal rate of 30 per cent sets in is Rs 2,50,000 and this have been kept constant since fiscal year 2005-06. Other Asian countries like Singapore has a marginal tax rate of 20 per cent, which is applicable on income of Singapore $3,20,000 and above, which is roughly Rs 87,77,600. In South Korea, the marginal tax rate of 35 per cent is applicable on income of Korean Won 8,00,00,000  and above which translates to around Rs 33,40,000. China has a system of monthly tax filing requirement and the high slab rate of 35 per cent sets in only at an income of RMB 60,001 per month  which translates to Rs 3,28,300.The maximum Chinese marginal tax rate is 45 per cent which is applicable on income over RMB 1,00,000 per month which translates to Rs 5,47,000 approximately. In Indonesia, the maximum marginal tax rate of 35% is applicable on income exceeding Rupiah 200, 000,000 which translates to Rs 8,27,800 approximately. So it is clearly evident that the maximum marginal tax rate in India sets in way too early and has been constant for the last three fiscal years. Simultaneously Indian economy has evidenced a year to year inflation of more than 4 per cent every year in the last three years and effectively the minimum threshold of real income on which the maximum marginal rate sets in is all the more lower.   These comparative analysis along with the effect of spiralling inflation definitely calls for a re classification of slabs. We think that the new slab rates along with tax rate should be as follows: for income up to Rs 2,50,000 there should be no tax at all. For income above Rs 2.5 lakh and up to Rs 5 lakh tax rate should be 10 per cent, for income above Rs 5 lakh and up to Rs 8 lakh the tax can be 15 per cent and for income above Rs 8 lakh tax should be 25 per cent.

Standard deduction

Benefits could be conferred to individuals, more specifically salaried class in the form of reintroduction of standard deduction. The removal of standard deduction has caused considerable harm to a salaried tax payer as it puts him in a less favourable position compared to other individual tax payers, who though admittedly never had the benefit of the same but always had and till now have other routes available to better manage their tax outflow. A case in point is that when an employer with holds tax at source while paying salary, it is debarred from taking into account most of the philanthropic contributions made by the salaried class which effectively increases the taxable salary and results in excess tax withholding. Though, the concerned individual definitely has the ability to claim the same while filing the return of income and claim a refund, it definitely creates a negative cash flow situation. Further, the non salaried class is eligible to claim expenditures incurred during the course of income earning activities which salaried class cannot except for availing benefits like conveyance allowance etc, and the quantum of exemption  granted therein and some other allowances  are anyway too meagre compared to the present day economics . Reintroduction of standard deduction would be a welcome and give salaried class a level playing field. Salaried individuals in other Asian countries like Malaysia, Indonesia also currently enjoy the benefit of standard deduction.

Benefit from home loan

Another benefit which can be relooked at is tax sop on interest payable in case of loans taken for purchase of house property especially when the Indian middle class is keen to purchase house properties. Presently interest up to Rs 1,50,000 per annum is allowable as a tax deduction if the property is used for self occupation. When a property is let out the entire interest amount can be shown as expense again the rental income. It would be a welcome change if the deduction is allowed at actual even when the house property is used for self occupation. Salaried employees would stand to gain immensely as such interest payments are taken into account by the employer while calculating the monthly tax on the salary.

Increase limit of Sec 80 C

Similarly, the government should consider increasing the ceiling limit under section 80C from Rs 1 lakh to a more reasonable level to Rs 3 lakh to applaud the constructive spending by a section of people. The benefit of such increase in limit is manifold. From an individual perspective it acts as a saving catalyst and today in India thanks to the boom in the information technology sector, the income earning population is on the increase, most of them being just out of college and spending all they earn. It would do good to tap this young generation and induce them to save for a rainy tomorrow. From the perspective of economy as whole, this would result in increase in savings rate creating more funds for productive investment. These rationlisations if introduced in the forthcoming budget would collectively be a wholesome benefit to the middle class, and would result in a higher disposable income, effectively making way for a higher domestic savings. – www.deccanherald.com