Politicians of India agree on one thing: all of them want to serve the poor and the farmer. No wonder the Finance Minister has allocated more funds for improving the conditions of the poor and for increasing the income of the farmer. Everybody is applauding. The rich businessmen know how to meander through the corridors of power quietly and get their interests promoted. Does anyone talk about the salaried class? The only time they talk about the salaried class is when they invite foreign capital: “India has a growing middle class, a burgeoning market, so please come and invest here and exploit them!” Nobody has done any study as to how much tax the salaried class pay but it is certain that they are the most taxed lot. The direct and indirect tax that they pay as a percentage of their income is definitely more than the percentage of tax the super rich pay out of their disclosed income. The tax that a software engineer who toils all day and night pays may be more than the tax paid by the persons who enjoy their drive in their BMWs and Audis. And what do the salaried get in turn?
The government schools are so bad that they send their children to private schools paying huge fees. Worse are the conditions of government hospitals. The supply of electricity and water is so erratic that they have to spend money on stabilizers and water tanks .He has to buy a car or scooter as the public transport is slow and overcrowded. When a business man buys a car, the interest on the car loan, the depreciation of the car, the petrol and other maintenance expenses are allowed as a deduction from his income. An employ is not entitled any such deductions. Perhaps India is the only democracy which treats the salaried class so shabbily that no amount whatsoever is allowed as expenditure incurred for earning salary. The babus of North Block think that an employee need not spend any expenditure to earn his salary and no politician cares for them. The clothes that they buy to wear to the office is his personal expenditure and hence not allowable as deduction. If he cares to shave before going to office, it is his personal expense. The USA, UK, Germany and even Singapore grant a standard deduction from salary. Who cares for the salaried employees of India?
The UPA and NDA governments vie with each other to please those who gamble in the stock market. Only the money that a company raises by issuing shares is used productively. The rest of the money that comes to the stock market to buy and sell shares in the secondary market moves from one pocket to another as in a casino and is not used productively. That is why the great economist Keynes called the activities of the stock market as “casino capitalism”. In this game of wits, the cunning and the crook win, others loose. Tax concessions are heaped on them. The gains on the sale of shares after one year from the date of purchase are totally tax-free. The gains made within a period of one year is taxed at a concessional rate . But look at what happens to the salaried class who deposits their hard earned money into fixed deposits with banks. The money deposited in the banks is given as loans to businessmen, farmers and consumers. The economy is benefitted by it directly. It is not used for mere speculation as is done in the stock markets. Yet no concession in tax is given to interest from fixed deposits .
The interest on fixed deposit is about 7.5%. The official rate of inflation is about 6%. The actual income after taking into account the inflation comes to 1.5%. The tax payable at the rate of 20% on the interest comes to 1.5%. Thus by depositing money in the bank one actually does not gain anything. As is well known, the official rate of inflation is much less than the real rate of inflation. So the salaried person who deposits money in the bank stands to lose the value of his hard earned money. No businessman puts his money in fixed deposits with banks. By demonetization, the government has forced the people to deposit all their money in the banks. Who benefits from that?. It is the businessmen who benefits from it. Earlier, a deduction for interest earned from bank deposits was given under section 80L of the Income tax Act. A similar deduction should be given at least for the sake of making good the loss on account of inflation. The government can reduce the tax burden of the salaried persons if the traders, businessmen, and professionals pay their taxes properly. In his budget speech, the Finance Minister has revealed some statistics which are alarming.
“As against 5.6 crore informal sector individual enterprises and firms doing small business in India, the number of returns filed by this category are only 1.81 crore. Out of the 13.94 lakh companies registered in India upto 31st March, 2014, 5.97 lakh companies have filed their returns for Assessment Year 2016- 17. Of the 5.97 lakh companies which have filed their returns for Assessment Year 2016-17 so far, as many as 2.76 lakh companies have shown losses or zero income. 2.85 lakh companies have shown profit before tax of less than Rs 1 crore. 28,667 companies have shown profit between Rs 1 crore to Rs 10 crore, and only 7,781 companies have profit before tax of more than Rs 10 crores.” “Among the 3.7 crore individuals who filed the tax returns in 2015-16, 99 lakh show income below the exemption limit of Rs 2.5 lakh p.a., 1.95 crore show income between Rs 2.5 to Rs 5 lakh, 52 lakh show income between Rs 5 to Rs 10 lakhs and only 24 lakh people show income above Rs 10 lakhs. Of the 76 lakh individual assesses who declare income above Rs 5 lakh, 56 lakh are in the salaried class. The number of people showing income more than Rs 50 lakh in the entire country is only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25 crore cars have been sold, and number of Indian citizens who flew abroad, either for business or tourism, is 2 crore in the year 2015.
From all these figures we can conclude that we are largely a tax non-compliant society. “Of the 76 lakh individuals who pay income above 5lakhs, 56 lakhs are salaried class . Traders, businessmen, professionals and others constitute only 20 lakhs. Similarly the statistics relating to companies show that there is huge evasion of tax by them also. These are the people who enjoy maximum benefits from the government but their record of tax compliance is very poor. The data of bank deposits after 8/11 can be used effectively against these recalcitrant persons. Tax evasion has almost become a habit for most Indians. They have become immune to the traditional investigation methods followed by the Incometax Department.
The department has developed new methods to analyze the huge data now available in digital form and they have done a creditable job in the period subsequent to 8/11. Once the restrictions are removed, most of the cash deposited will be withdrawn. It would be better if the department keeps an eye on the withdrawals from those accounts where the amounts deposited were disproportionate to the income declared earlier. Monitoring expenditure on luxury goods and services and linking them to PAN is already underway. Investigation is a time consuming process. The proposal in the Finance Bill 2017 to reduce the time for completion of assessment to 12 months acts against the avowed determination of the government to prevent tax evasion. One can only hope that at least in the next budget, the Finance Minister will give some relief to the silent tax payer- the salaried class.
(The writer is a former Chief Commissioner of Income Tax)
