Tangled web of personal taxes

In his Budget speech, Finance Minister Arun Jaitley promised ‘transformative measures’ in direct taxes and proceeded to announce a simpler tax regime for companies. Thus, the corporate tax rate is to be slashed from 30 per cent to 25 per cent over the next four years with exemptions being eliminated. Individual tax payers may welcome such simplification and rationalisation too. But for them, tax laws seem to be moving in the opposite direction.

Take this Budget, where the Finance Minister has eschewed the simplest measures — raising the section 80C limit to ₹2 lakh and the basic income tax exemption to ₹3 lakh or ₹4 lakh, in favour of a bunch of new supplements to section 80C which tell investors where they should invest for tax exemptions.

“I don’t have a girl child. I have a son. So does that mean I should lose out on tax breaks?” asks a reader, referring to the fact that the Sukanya Samriddhi Scheme, the new Central scheme for girl children, has been granted attractive tax breaks in this Budget. To win additional tax concessions this year, you need to have a girl child under 11, open an NPS account (section 80CCD), top-up your health insurance (section 80D) or donate to the Swacch Bharat Kosh or Clean Ganga project (section 80G).

Even the tax slabs are a welter of confusion, with separate computations for ordinary citizens, senior citizens, super senior citizens and lately, the super-rich.

But Jaitley has only built on the complications created by his predecessors. Tax experts point out that measures to simplify and rationalise personal taxes made the most progress between the mid-80s and the 2002-03.

Thereafter, it has been a backward slide. If you were a salary earner in the 70s, you wouldn’t complain about today’s tax regime. Forty years ago, India had as many as 11 tax slabs, with rates ranging from 11 to 85 per cent. For a few taxpayers, the effective tax incidence could be over 95 per cent!

It was Finance Minister VP Singh who set about pruning the tax slabs and the rates in 1985. He managed to reduce the tax slabs to four and the peak tax rate to 50 per cent. Manmohan Singh during his stint as FM kicked off economic reforms, set about pruning the tax slabs to just three between 1991 and 1996.

But it was P Chidambaram who put the finishing touches to this rationalisation exercise. By 2003, he had reduced the complicated labyrinth of personal taxes to just two slabs — 20 per cent upto ₹4 lakh and 30 per cent for anything above. He also did away with the standard deduction, simply increasing the exemption limit instead. It was he who should take credit for replacing the complex section 88, which gave taxpayers a 20 per cent ‘rebate’ on investments, with the present section 80C, which offered an umbrella limit for special investments in 2006.

However, demands from different interest groups and taxpayers have taken over again in the last five years, halting the simplification effort in its tracks. First, section 80C was supplemented with several siblings — 80D for medical insurance, 80 CCD for NPS contributions, 80CCC for other pension funds, 80E for education loans and so on.

Then the need to make the tax regime more inclusive has seen separate slabs being carved out for senior citizens (over 60 years), super senior citizens (over 80 years), women (since removed) and lately the super-rich (who don’t have a separate slab but pay more surcharge).

Surcharges and cesses have made a comeback too with education cess taking over from the National Calamity Fund and new surcharge for the super-rich making a debut.

Overall, taxpayers today are certainly better off than in the 70s. But do they find the tax system simple and rational? Hardly anyone would agree.

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