Powerful economic agents always get their voice heard while the Union Budget process is underway. Unfortunately, the articulation by the weaker sections is generally ignored as they are not well organised and often their pleas are dismissed as requests for handouts. Any measures in favour of these weaker elements are considered as populist while the stronger elements claim that incentives for themselves are productive. This attitude cuts across the entire political economy spectrum. It is, therefore, necessary to also ensure that the voice of the disadvantaged is also heard and that there is effective distributive justice.
Anomalies in Income Tax
Over the years, glaring anomalies have been accentuated in the structure of income tax. A basic principle that income is income and should be taxed according to a progressive structure has been given the go by. The Direct Tax Code, which was a comprehensive exercise, has been put aside as strong economic agents have seen to it that their privileges are not reduced. It is recognised that a tax system cannot be a simple exercise in giveaways but periodically there must be an assessment so that gross anomalies are corrected.
Basic Income Tax Exemption Limit
It is often argued that only a very tiny segment of the population is subject to income tax and any increase in the basic income tax limit would drastically reduce the number of income tax payers. The problem is that there are large tracts of high income which are outside the income tax net and hence the income tax burden falls unfairly on a small segment of the population.
First agricultural income is totally exempt from income tax. It is worth examining whether this is common the world over or is it a peculiar aspect of the Indian tax structure. Understandably, this is a sensitive political economy issue. A possible way out would be to fix an entirely different structure of income tax rates for agriculture with a relatively higher exemption threshold as compared with the regular income tax.
Secondly, for the past 18 years the treatment of dividend income, with a Dividend Distribution Tax (DDT) at the company level and a total exemption of dividend income in the hands of the final recipient of the dividend, results in individuals having very large incomes outside the income tax net. The DDT is iniquitous to the lower income groups and needs to be done away with and the earlier system reintroduced, of taxing dividend income in the hands of the final recipient of the dividend. The ground reality is that although the present system is a fiscal atrocity, no government would dare to revert to the erstwhile system which was most equitable as the tax payer was taxed according to the level of income.
The basic exemption limit for those below the age of 60 years should be raised from Rs 2.5 lakh to Rs 3.0 lakh and for senior citizens above age 60 but below age 80 could be raised from Rs 3.0 lakh to Rs 3.5 lakh. It is necessary to take note of the longevity in India and hence there should be an intermediate category of senior citizens over 70 years but below 80 years where the exemption limit could be Rs 4.0 lakh. Senior citizens inevitably face health problems and need assisted living.
Restoration of the Standard Deduction
The standard deduction for salary and pension incomes was all along part of the income tax system but a few years ago this was abruptly done away with. This has created considerable heartburn as self-employed persons are able to take very significant deductions from their gross income. There is considerable merit in restoring the erstwhile standard deduction.
Interest on Bank Deposits
Interest on bank deposits is the predominant portion of income for most senior citizens. The earlier 80L deduction was abolished and this has resulted in hardships, particularly for senior citizens. In recent years a deduction of Rs 10,000 has been introduced for interest on Savings Bank accounts. To avail of this concession a saver has to hold Rs 2.5 lakh in Savings Bank Accounts which is in the reach of only the very well off segments. Most of those who open Jan Dhan Accounts would obviously not need this concession. As such, the deduction from income of Rs 10,000 of interest from Savings Bank Accounts is miscued. To make this concession more purposeful, it should be allowed for all interest on bank deposits including fixed deposits. It must be stressed that those dependent on bank interest have seen a major erosion of their incomes because of the fall in interest rates. It is, therefore, suggested that this concession should be available to all bank interest and the amount should be enhanced to Rs 30,000.
National Pension Scheme
In India only a very tiny segment of senior citizens are covered by pension schemes. In this context the introduction of the National Pension Scheme (NPS) is indeed welcome. At the present time a deduction of Rs 50,000 per annum is allowed as a deduction from income for subscription to the NPS. This is very small and the deduction should be raised to Rs 1 lakh. Furthermore, there is much merit in the recommendation of Mr. R.V.Verma, member Pension Fund Regulatory and Development Authority (PFRDA), seeking a tax exemption for the NPS at the withdrawal stage. The need for a well spread and performing pension system cannot be overemphasised and the suggestion of the PFRDA to make the NPS more attractive should be favourably considered. (Syndicated)
