Published On: Fri, Oct 20th, 2017

Why Its Time to Revisit Income Tax on Individuals

The Bharatiya Janata Party (BJP) had promised a “simplified tax regime” for providing a non-adversarial and conducive tax environment and a rationalised and simplified tax structure. However, thus far, it remains like any politicians’ promise. While everyone probably admits to the immorality of a tax based on an individual’s earning power, no one really does anything about it. The governing system, where power is given to a few to extract revenue and spend it as they choose, will always lead to inequity. Let us examine the troubles a salaried person goes through. Or an ‘honest’ taxpayer, if there is one, goes through.
As a salaried person, everything we spend on is with ‘after-tax’ money. Do you understand the implications? Let us assume you earn Rs1 lakh a month. And for the sake of simplicity, I assume that you are paying a monthly income tax of Rs20,000. Thus, in effect, 20% of all your money is confiscated and your wage is now only Rs80,000. Thus if you buy something at, say, Rs1,000 it has actually cost you Rs1,250 of your income or gross salary. You go to a restaurant for a meal. Your bill, let us say, comes to Rs500 for the food. And you will pay another Rs60 to the government and say Rs40 as tips. You have paid Rs600. From your gross salary, you have paid Rs750 for food worth Rs500!
On the other hand, a businessman passes off all his personal expenses (car, driver, repairs, home air-conditioners, rent, utilities, servant, food, entertainment, birthday bashes, and family weddings) as ‘business’ expenses, which are tax deductible. Therefore, the government sacrifices 30% tax on everything he spends. What he gets as a salary or commission or dividend, it goes largely to his ‘savings and investment’ pool of money. The businessman can buy a car in the company name. He will also get depreciation on it that is deductible from income. The salaried have to buy a car from the ‘after tax’ money, which means you end up paying effectively paying 25% extra from your gross salary. Thus, in effect, the businessman is nearly twice as well off you are, with the same level of earning, assuming the same level of earning.
Personal income tax is unjust.  A very few percentage of the population actually pay it. And if people tell me that businessmen are very honest and do not park personal expenditure in to business expense accounts, I can share the many tall tales I know. The businessmen will build ‘holiday homes’ for ‘staff’ welfare. And some rooms will be locked and reserved for the owner and family. Of course, nothing beats the joy of having a private aircraft that is used mainly for parking at the hangars, when not used for personal enjoyment or doling out favours.
As a salaried individual, you are paying through your nose for the house you bought. Just work out your EMI and factor in the tax you paid on that. Every asset you buy comes out of ‘after tax’ money. You cannot even claim deduction for the mobile phones that different family members use today as a necessity. Businessmen even charge their cable television and newspaper bills to the expense account. Thus, when you hear the term ‘income tax’ it is different for each class of individuals, depending on their station in life. And it goes against the grain of the government’s public stand of ‘taxing the rich’. In effect, income tax penalises the salaried class and rewards the rich who are like ‘legally incorporated tax entities’ for business! Businessmen are now being promised a lower corporate rate of taxation as opposed to sweet nothings for the salaried slaves.
The government already takes a huge cut by way of Goods and Services Tax (GST) on everything we buy. And the government pays lip service to inequality, when they exempt gem and jewellery or the legal profession from GST! The government is FOR the rich, influential and the pressure groups. The politician points out to other countries with similar rates of income tax and says that India has a moderate tax regime. Absolute rubbish. Look at both taxes together. GST, cess and other imposts on expenditure in conjunction with Income tax will be far higher in India. Singapore, for instance used to have a GST at 3% or 4%.
As a start, the government can start ‘disallowing’ a lot of business expenditure. For instance, deprecation on cars, fuel, driver on cars, guesthouses, holiday homes, jet aircrafts, and entertainment expenses. That will probably go a long way to equalise the impact of income tax across different class of earners. In the alternative, allow individuals to become a one- man incorporated entity, with the same tax treatment as a business entity. Even in cash flow terms, the salaried individual pays his taxes monthly as opposed to quarterly by the businesses. A businessman will ‘employ’ his entire family as salaried individuals in his various corporate entities and build his wealth. The businessman even charges his insurance premium to the business as a tax-deductible expenditure!
All of this abuse can go if income taxes are totally scrapped. If the government wants, let it be tax free, say, up to a crore or two a year. And the government will also be saved of all the efforts it puts to harassing salaried individuals including senior citizens who have to file returns, answer queries and be treated like criminals by tax officials. Even when it comes to personal income tax, if a salaried individual goes to a consultant, the fees come out of the ‘after tax’ money where as the businessman charges it off as an expenditure.
Redistribution of wealth and reduction of inequalities is a pipe dream that all politicians and liberals mouth. Whenever there is progress, there will be inequality. And with such a huge population, India has a bigger problem than other countries. Giving away a slice of a salaried individual’s income is not going to solve this problem. As Warren Buffett says, the rich pay lower taxes. All the exemption schemes that are dreamt up by their lobbyists cost more than the personal income taxes collected.
Dear Prime Minister and Finance Minister, it is time you made history by doing away with personal income taxes. That will also be another weapon to channel more white money. More disposable income will also encourage savings and spending, giving a much needed boost to the economy.
[“Source-moneylife”]