Simplifying the Income Tax Structure for Individuals in India

These changes are suggested in the Income Tax Act with a view to greatly simplifying the Taxation and Tax Computation Structure.  There is no recommendation here to reduce the Income Tax rate.

Apart from the simplification it will result in,  it will also mean a tremendous saving for the  Employers’ (Govt & Private Sector) and the IT Department  in the administrative costs of computing and determining Income Tax as well as  Salary Slip printing & stationery costs

My basic recommendation is this :  Scrap all Tax Free allowances  and compensate for the same by due adjustment of “initial tax exemption amount”  and “Tax Slab Adjustment”

The major Allowances that currently qualify for Tax Exemptions (under various conditions and particularly for the salaried class) are :

Sl No	Type of Allowance	Normal Amounts for which Tax Exemption Claimed Annually	Guesstimated Weighted Average of Exemption Claimed (Annually)
1.	House Rent Allowance	Rs. 60 K  to  Rs. 720K	Rs. 300 K
2.	Medical Allowance	Rs. 15 K	Rs. 15 K
3.	Leave Travel Allowance	Rs. 15 K  to  Rs. 100 K	Rs. 40 K
4.	Conveyance Allowance	Rs. 9.6 K (Rs. 800 p.m.)	Rs. 9.6 K
5.	Food / Meal Allowance	Rs. 10.5K (Rs. 875 p.m.)	Rs. 10.5 K
6.	Educ Allowance	Rs. 2.4K (for 2 children)	Rs. 2.4 K
		TOTAL WEIGHTED AVERAGE of EXEMPTION CLAIMED ANNUALLY	Rs. 377.5 K

Hence the recommendation is that if these allowances are withdrawn and cancelled for claiming tax exemption,  the tax payer must be compensated by a like amount,  which can be done by raising the present Tax Exemption Limit from Rs. 200 K  to Rs. 577.5 K.

Assuming that the guesstimated figure of Rs. 377.5 K  being claimed as exempt from Income Tax is correct,  the fact remains that this is essentially applicable for Salaried Persons.  Thus,  raising the Tax Exemption limit to the full extent of the above  “estimated Tax Exemption Loss”   will bestow an unintended tax reduction benefit  on all those who are not salaried persons.

Keeping the above in mind,  the following is recommended.

a)    Complete Withdrawal of Tax Exemptions under the above 6 heads.

b)    Compensate for the corresponding tax increase on the taxpayers as follows :

1.    Raise Minimum Tax Exemption Limit for all tax payers from the current  Rs. 250 K to Rs. 350 K (in case of Senior Citizens, raise it from Rs. 300 K to Rs. 400 K and in case of Senior Citizens above 80 years,  raise it from Rs.500 K to Rs. 600 K)

2.   Introduce, additionally, Standard Deduction @ 30 % of Gross Salary for all salaried persons subject to a  maximum of Rs. 100K

3.    Raise the Income Slabs for 10 % and 20 % Income tax Rates as under :

i)   Change 10 % IT Rate Slab from the current Rs. 201 K - Rs. 500 K  to  the revised Rs. 201 K - Rs. 800 K

ii)  Change 20 % IT  Rate Slab from the current Rs. 501 K - Rs. 1000 K  to  the revised  Rs. 801K - Rs. 1500K

The rationale behind the above recommendations is as under :

     a)    Compensate the tax payer for the withdrawal of various tax free allowances by raising the minimum tax exemption limit ;  in doing so, it is true that some people who are not salaried persons will get a “bonanza’ because of the raising of this tax limit.  

     b)    To restrict such ‘bonanza”  the minimum tax exemption limit raise has been restricted to Rs. 100 K only.

     c)    However,  to compensate the salaried tax payers who were availing this tax exemptions,  they are compensated by giving them a tax relief through the “standard deduction route”  which is applicable only  to salaried employees.

    d)    Finally, the higher bracket salaried persons who are not fully compensated in the tax exemptions they used to enjoy under various allowances (which are proposed to be withdrawn now),  the Slabs for 10 % and 20 %  IT rates are proposed to be widened so that they get compensatory relief there.

The above is intended to be purely a revenue – neutral  but Income Tax Structure simplification measure,  which will have the following  concomitant benefits :

     1.    Tax Computation and Tax determination will become far simpler and easier.

   2. Tax Structure of various organisations (government and private) can be drastically simplified by reducing the number of heads of payment,  which were primarily introduced to take advantage of the various tax exemptions so far allowable under the Income Tax Act ; thus every salary structure can now have as much as 6 fewer  “heads of payment”  viz., HRA, Medical, LTA, Conveyance Allowance, Food Allowance and Education Allowance,  since having these heads will no longer reap any tax benefits.

   3.  This also means that people will not have to fudge and manufacture documents for claiming tax benefits,  particularly for the heads related to  HRA,  LTA  and  Medical.  To that extent,  the IT department does not have to spend time and energy in “verifying”  that such claims are genuine or not,  which will mean a tremendous saving in administrative time spent and costs incurred for such  work in the IT Department.

The figures mentioned above are purely based on the undersigned’s best estimates and are certainly not claimed to be accurate.  It is recommended that,  based on the information available with the IT department and the government,  these figures may be fine-tuned and the various figures adjusted to result in a revenue- neutral,   re-alignment of the Income Tax Structure.

Thereafter,  if the government wishes to give some tax relief to the tax payer, it may do so in addition to what is recommended above.

This is also in consonance with the spirit of the  Direct Tax Code (DTC),  that is built on the very sensible premise of scrapping all exemptions and compensating for the resultant “increased tax liability”  by a suitable tweaking of tax rates, tax slabs and minimum tax exemption limits.