Poor middle class is getting taxed more: The gold standard demands 10% tax slab to start from Rs 10 lakh today Basic income tax exemption limit of Rs 1 lakh in the year 2005-06 was worth 145 gm of gold then. However, at Rs 2.5 lakh basic exemption limit, it is worth a tiny 34 gm now. So, poor people are getting taxed with unchanged rates not factoring adverse impact of inflation. At gold standard the tax slab of 10% should start from Rs 10 lakh in 20024 which is worth 145g gold
There is an old saying in India that an ideal tax system should work just like a honeybee sucking nectar from a flower: It shouldn't hurt the flower when the delicious honey is being pulled out. However, have governments been fair, like a honeybee, when it comes to levying income tax on the middle class - the most honest taxpaying group?The intention behind collecting income tax is noble as it helps in wealth redistribution and contributes to the growth of the economy. And, the Indian middle class is one of the most prominent groups that contribute to the nation's revenue through income tax. However, the process fails to live up to its intended goal when it starts taxing people with relatively lower income.
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Money loses its value with time due to inflation. So if tax slabs are not increased with time, it would mean people are paying income tax on lower real income. This has become an issue worth serious consideration today.
According to budget 2014, an income tax rate of 20% became applicable on income above Rs 5 lakh and 30% on income above Rs 10 lakh. This has not changed in the last 10 years. If we take average inflation to be 6%, the real value of Rs 5 lakh and Rs 10 lakh of 2014 would now be Rs 2.8 lakh and Rs 5.6 lakh, respectively.
What it means is that while people were paying 30% income tax on income above Rs 10 lakh in 2014, they are now paying 30% income tax on a real income of Rs 5.6 lakh, when compared with 2014. This clearly shows that relatively poorer people with lower real income are now paying a higher income tax.
The current taxation system appears to be very tough on the Indian middle class, especially the lower middle class. The budget of 2005-06, presented by P Chidambaram, is famous for being middle-class friendly and is still touted as "a dream budget". In that budget, the finance minister significantly raised the tax slabs - 10% tax on income above Rs 1 lakh to Rs 1.5 lakh, 20% tax on income above Rs 1.5 lakh to Rs 2.5 lakh and 30% tax on income above Rs 2.5 lakh.
Let us compare the current tax slabs to the ones in that dream budget after discounting the impact of inflation. For this, let us use gold prices as the metal is considered an ideal hedge against inflation. If a tax system has to be fair in accommodating the adverse impact of inflation on the value of income over time, it should aspire to reach closer to the gold standard when deciding tax slabs.
Let us measure the tax slabs of year 2005-06 to the current ones in terms of gold weight and its valuation. According to Reserve Bank of India (RBI) data, the price of 1 gram of gold in 2005-06 was Rs 690. So you could have bought 145 grams of gold for Rs 1 lakh - remember that there was no income tax at that level of income then. If you sell this gold at the current price of Rs 7,275 per gram (IBJ rates on July 11, 2024), you can easily get Rs 10.54 lakh.
What it means is that going by the gold standard, the lowest income tax slab of 10% should be levied on those with income above Rs 10 lakh to keep it inflation-proof, when compared with the tax slab of 2005-06. Similarly, the 20% slab should start from Rs 15 lakh and the 30% tax slab from Rs 25 lakh if this budget wants to be another dream budget.
The government may argue that it has done its best to comfort the middle-class taxpayers by bringing in a new tax regime with a much lower tax rate on higher income and no tax on income up to Rs 7 lakh. However, the new tax regime offers no significant deductions and exemptions that are available under the old tax regime. There is no incentive for a person saving more tax with all the deductions and exemptions under the old tax regime to shift to the new tax regime.
This is a pain point as people plan their household finances in a way to optimise their income tax outgo by taking a long-term view. Many taxpayers who purchased homes with a 25-year home loan repayment schedule did not factor in a tax regime change in subsequent years. Similarly, people took investment decisions such as investing in Public Provident Fund (PPF) for 15 years and in Sukanya Samriddhi Accounts for an even longer period. House rentals have gone up significantly over this period but house rent allowance (HRA) - which offers a big relief to taxpayers - is only available under the old tax regime.
Cost of higher education has also gone up significantly. Many taxpayers would have taken education loans for their child's higher studies, and the repayment would run for 7 years after the completion of the studies. Yet, the deduction on interest can be claimed only under the old tax regime.
There are many such targeted relief measures in the old tax regime that helped certain people. A marginally higher tax slab of Rs 7 lakh in the new tax regime fails to address the concerns of many such taxpayers who have planned their household finances keeping the old tax regime in mind.
The dream budget of 2005-06 raised the tax slab over and above the prevailing deductions and exemptions. So if this budget aspires to be a people's budget, it needs to replicate the bold moves taken in 2005-06 using a gold standard. The slab rate would need to rise much higher in the new tax regime if the government truly wants to compensate people for the relief they had aimed to get on various eligible expenses under the old tax regime.
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This story originally appeared on: India Times - Author:Faqs of Insurances
