Time to change Direct tax laws

The Central Board of Direct Taxes (CBDT) on 19 August 2016 had placed a new version of the income distribution data for assessment year (AY) 2012-13.This data was the first since 1998-99. Also with rescheduling the budget session earlier Modi Government has already started preparation for next year budget. In light of these facts I would like to suggest some changes based on the data published by CBDT.

Major highlights of 2012-13 data were published in several papers/blogs so I am not going to repeat the same. What I am doing to discuss is the analysis which I have done on Section 2 Income Tax Returns – Individuals of the report.

On 28 Feb 2011 our Finance minister Mr. Pranab Mukherjee declared enhancing IT slabs by 20,000 for all categories which changed the IT slabs to the following:

Category Man <60 Yr Woman <60 Yr 60-80 Yr >80 Yr
0% 1.8L 1.9L 2.5L 5.0L
10% 1.8L to5.0L 1.9L to5.0L 2.5L to5.0L
20% 5.0L to8.0L 5.0L to8.0L 5.0L to8.0L 5.0L to8.0L
30% > 8.0L > 8.0L > 8.0L > 8.0L

 

But for sake of simplicity (as I don’t had breakup of male/female/senior citizen) I have done my calculations by taking following IT slabs (Deliberately taken 10L instead of 8L to align with current numbers)

Category All
0% Upto 2,00,000
10% 2,00,000 to 5,00,000
20% 5,00,000 to 10,00,000
30% > 10,00,000

 

From table 2.1 of Individual– Gross Total Income (AY 2012-13) from Income Tax Return Statistics for Assessment Year 2012-13 (version 2.0) it is evident that there were 2,89,25,598 Individuals returns filed.  Major points of my observations are:

  1. These 2.89 cr people (which were<3% of Indian Population) declared almost 12.15 Lakh cr as income.
  2. If there were no exemptions other than mentioned in IT slabs GoI would have got 1.55 lakh cr as tax revenue but instead they got 1.12 cr lakh cr (Table 2.11 Individual- Range of Tax Payable (AY 2012-13).
  3. The reason for this difference is the range of exemptions given by GoI. As of today an Individual can avail 22 different types of exemptions but majority of Indian salaried persons are not using it. There are many reasons of such behaviour. First and foremost is ignorance of such large number of exemptions. Second reason is that majority of salaried people (94.5% ) fall under salary bucket of 10 lakh which does not give incentive of putting up resources to avail all exemptions.
  4. Majority of people still avail section 80 exemptions for future savings, purchase of house, tution fees etc. If UPA -II would have removed all exemptions and increased exemption to 2 lakh in 2011 than also they would have collected 1.31 lakh cr as Tax (excluding surcharges). In addition they would have got support of atleast 2.73 cr Individuals (having gross income <10lakh) and their dependents.

For example there were 3 people in India who had income of more than 500 cr in 2011-12 and they had total Gross salary of 1,920 cr on which they paid 437 cr as tax while in No exemption scenario GoI would have realised atleast 575 cr. This shows that if you have good income you can probably pay less after hiring a competent CA.

Range No. of Returns Sum of Gross (cr) Average Gross (lakh) If no exemptions (cr) With 1 lakh limit Exemption (cr) With 2 lakh limit Exemption (cr)
< 0 155501 0 0
>0 and <=1,50,000 30,13,171 25,679                         0.85 0 0
>150,000 and <= 2,00,000 73,61,219 1,32,623                         1.80 0 0
>2,00,000 and <=2,50,000 44,00,926 97,667                         2.22                   964.85                                 –
>2,50,000 and <= 3,50,000 47,92,311 1,40,556                         2.93               4,470.98                                 –
>3,50,000 and <= 4,00,000 14,11,154 52,758                         3.74               2,453.49                    1,042.34
>4,00,000 and <= 4,50,000 11,84,934 50,260                         4.24               2,656.13                    1,471.20                         286.26
>4,50,000 and <= 5,00,000 10,25,891 48,669                         4.74               2,815.12                    1,789.23                         763.34
>5,00,000 and <= 5,50,000 8,67,289 45,415                         5.24               3,011.98                    2,144.69                     1,072.34
>5,50,000 and <= 9,50,000 29,70,300 2,07,009                         6.97             20,609.70                  17,639.40                   14,669.10
>9,50,000 and <= 10,00,000 1,52,453 14,858                         9.75               1,904.43                    1,751.98                     1,599.52
>10,00,000 and <=15,00,000 8,22,430 99,029                       12.04             28,063.84                  27,241.41                   26,418.98
>15,00,000 and <= 20,00,000 3,02,371 51,905                       17.17             14,966.76                  14,664.39                   14,362.02
>20,00,000 and <= 25,00,000 1,56,984 34,972                       22.28             10,177.63                  10,020.65                     9,863.66
>25,00,000 and <= 50,00,000 2,05,342 68,695                       33.45             20,197.82                  19,992.47                   19,787.13
>50,00,000 and <= 1 cr 66,632 45,364                       68.08             13,475.94                  13,409.30                   13,342.67
>1 cr and <=5 cr 33,928 61,052                    179.95             18,247.74                  18,213.82                   18,179.89
>5cr and <=10cr 1,826 12,375                    677.71               3,708.85                    3,707.02                     3,705.20
>10cr and <=25cr 729 10,635                 1,458.78               3,188.89                    3,188.16                     3,187.44
>25cr and <=50cr 128 4,225                 3,300.95               1,267.31                    1,267.18                     1,267.05
>50cr and <=100cr 50 3,467                 6,933.71               1,039.96                    1,039.91                     1,039.86
>100cr and <=500cr 26 5,154              19,821.65               1,546.04                    1,546.01                     1,545.98
>500cr 3 1,920              63,997.96                   575.98                        575.97                         575.97
Total        2,89,25,598       12,14,287         1,55,343.42              1,40,705.12               1,31,666.41

After going through one year data we can’t actually judge the quantum of effect of removing exemptions but my suggestion to Mr. Narendra Modi and Mr. Arun Jaitley is to remove exemptions slowly for Individuals as well and replace it with flat exemptions. As a first I would suggest remove MEDICAL REIMBURSEMENT (15000) & Transport TRANSPORT ALLOWANCE (19200) and increase IT slab by 50,000 to INR 3,00,000 or increase the 80 c limit. The rationale behind for this proposal is bitter truth that most of the people produce fake bills to realize these kinds of exemptions.

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