Union Budget 2022

Think of the Honest Taxpayer for a Change

Dr. RAJAN KATOCH

It’s the time of the year when the pundits come out with their expectations from the Union Budget. The Finance Minister gets free advice on how much should the fiscal deficit be, which sectors should be prioritized, which policies should be changed, what will enthuse the markets etc.

For the long-suffering honest (mostly salaried) taxpayer, most of what happens in the Budget doesn’t matter. They have no choice but to pay taxes, since their incomes are transparent and employers deduct taxes at source. Neither do they have the wherewithal to avoid or evade taxes. This group includes people like soldiers, pensioners, teachers, clerks in government offices, employees in the organized private sector. It does not include people like rich businessmen, well to do professionals or large landholders who can hire the best advisers and more or less choose how much tax to pay.

This group of honest taxpaying people deserves sympathy and relief. For them, what happens to the income tax rates is what matters. When income tax rates go up, surcharges or cesses are imposed, their take-home income goes down. Grand announcements, tweaking of indirect tax rates, special purpose exemptions and loopholes, new schemes in the Budget, all these leave them cold. The budget that leaves more money in our pocket is a Good Budget.

With this perspective, here’s a very modest wish list for a Good Budget.

The first is to reduce and cap the effective burden of income tax. In theory, the maximum marginal income tax rate is 30%. In practice, tax surcharges and cesses raise the effective rate substantially. These should be done away with, and tax rates rationalized, with the effective maximum marginal rate certainly not more than 30%.

Why should they be done away with? Surcharges amount to a backdoor increase in tax slabs. As for the cess, currently levied in the name of funding health and education, it’s an inherently inefficient mechanism for funding specific sectors. Ideally, financing for education or any other public purpose should be directly budgeted. If there is political commitment to these expenditures, adequate funds will be made available. If there isn’t, well then, having a cess makes no difference! For example, according to a CAG Report, over Rs. 94,000 crores of secondary and higher education cess collected in 2017–18 remained unutilized!

Second, the partial reform introduced in 2020–21 of having a new income tax system with lower rates and fewer exemptions and deductions needs to be carried forward to its logical conclusion. The new regime hasn’t yet caught on. The old regime with lots of exemptions and deductions appears enticing to all, but tends to benefit higher income groups and special interests more. It should ideally be phased out. This step will be more acceptable if it goes hand in hand with the reduction of the effective tax burden and elimination of surcharges and cesses.

Third, we really need to bring in stability in the regime, whatever it is. Every budget sees changes in rates, exemptions, notifications, forms. Why do we need to keep chopping and changing the system? Why isn’t it possible to declare that whatever rates are decided upon, whatever forms are decided upon, there will be no change in them for (say) three years or five years? It would help everyone plan better for the future and make compliance (and collection) easier. Bringing about predictability in taxes would incidentally also improve the climate for investment.

Fourth, it is acknowledged that the Income Tax Department has commendably begun reforming its processes with initiatives in faceless assessments, independent collection of information, big data mining and analytics. This has to be the way to go forward. Certainly, more analytical effort is needed in expanding the tax net and getting those who earn taxable income but do not pay to share the burden. Less emphasis is needed towards the lazy option of squeezing more and more out of the salaried taxpayers who are already in the net.

Suppose all this happens. What will be the effect?

For one, rationalization of taxes is unlikely to lead to a revenue loss. That has been the experience worldwide. Many people, and here I include the taxpayer who may have a choice, would not be averse to paying tax due if the rates are reasonable and the process simple.

Further, for an economy with sluggish demand a problem, income tax relief may actually help. Recall that in 2020, in the midst of covid, a huge corporate tax cut was undertaken as a demand boosting measure. It was a windfall for corporates, but the expected spike in investment did not happen. Assuredly, there are much more chances of increase in the disposable income of taxpayers going towards consumption expenditure (and thereby boosting demand) than there ever were of the beneficiaries of the corporate tax cut making fresh investments! As a class, the tendency of the salaried taxpayers in particular is to splurge any extra take-home income. A lower income tax burden on compliant taxpayers is more likely than not to help the economy.

It’s also a good time to be bold. There has been a surge in direct tax collections this financial year. More than 85% of the targeted collection has been achieved by December. The chairman of the central board of direct taxes is on record as asserting that the budgeted target of Rs. 11.08 lakh crores for the financial year 2021–22 will be exceeded.

Will this be the year in which the Budget simplifies the income tax regime and lessens the burden of the tax paying class? Or will the honest and salaried taxpayers have to be content with shouldering the burden of the non-taxpaying wealthy, as usual?

We can always hope. As an ancient poet put it, hope springs eternal in the human breast!

(First published in Rising Kashmir)

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Economic Affairs, Simplified

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Rajan Katoch

Rajan Katoch

Economic Affairs, Simplified

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