With the Budget raising tax exemption limit for individuals by a pittance,
the 2 per cent jump in service tax will only drain you of your wealth
The much-awaited rate cuts by the Reserve Bank of India did not happen. The Railway Budget was at least not boring, especially the political showdown after the minister presented his Budget proposal in the Parliament. The last event of that week, the Union Budget, was a damp squib; it had nothing to cheer about for anyone. A lot has already been said about the zero or negative impact of the increase in tax slabs, where the taxpayer will be able to save only `20,000 more a year, while the tax on services annually adds up to a lot more than the savings. The finance minister, in his wisdom, has offered tax exemptions on savings bank interest income of up to `10,000, which was so far taxable.
Why will anyone wish to earn an insignificant cant sum from a savings bank account when they can earn more from a fixed deposit or more tax-efficient returns from a liquid fund? If the argument is that such savings are for small savers, they need to have `2 lakh to `2.5 lakh n their savings bank account to earn `10,000 as interest income. Personal income tax seems to be sans any logic. Take, for instance, the`1 lakh tax-saving limit offered under Section 80C of the Income Tax Act, 1961. It is uniform across taxpayers. Which means for someone earning `3 lakh a year; 33 per cent of this income needs to be diverted towards tax-savings instruments to get to a zero-tax state.
Compare this to someone earning `10 lakh; the sum needs to claim tax benefits are just 10 per cent of his income. Common sense will tell you that for someone with low income it is that much more difficult to invest to save taxes compared to those earning more.
The government may argue that it is being equitable when it comes to offering tax benefits to all taxpayers. The lack of reasoning or logic behind tax savings goes further when one analyses the various products that one can invest in to receive
tax benefits. In the absence of social security, the central government should ideally have stated its intent towards long-term needs with tax-saving instruments, which would have found many takers. Yet, there is hardly any long-term tax planning scheme on offer. The equity-linked saving schemes (ELSS) have the shortest lock-in of three years and the Public Provident Fund (PPF) is a 15-year plan. I am not getting into the New Pension System (NPS) because its very status is still debatable.
The very premise of income tax takes into account the government’s income needs and not what works best for the taxpayer. It is for this reason that we have seen frequent changes in tax rates, rebates and tax-saving instruments. Let me illustrate with an example. At a very basic level, life insurance needs are arrived at by taking into account one’s income. If the government had worked towards an insurance scheme linked to one’s income, it would have got 35 million policyholders immediately.
The sheer number would have forced insurers to lower costs on pure term plans and it would have ensured that every income earner is adequately insured. Likewise, if the tax savings on health insurance was instead used
for a health insurance plan, it would have done wonders. reckon that the requirements of over 90 per cent of taxpayers is basic; they need a term plan to protect their dependent’s future finances, they need a robust health insurance plan to get treated for illnesses they may contract, and save towards a secure pension plan for their retirement. If the government had worked on tax benefits with these issues in mind, it would have done a great service to all taxpayers and also to its own coffers.