Sunday, February 05, 2006

Don’t Tax my Salary, Mr. FM

Its that time of the year again!!! A whole host of industry associations, tax-experts, finance managers and their aunts have crawled out of the woodwork once again with their wish lists for the finance minister.

Cut excise duties on cars – It would be a great employment generator.
Cut Tax Rates, Tax Collections will rise? Laffer, the famous economist dude said so.
Do not raise taxes on essential commodities; we are already overburdened with an increase in Oil prices.
Blah blah blaaah and some more blah.

I am a simple man with a very simple wish.
Out with taxes on Salary.
Do I hear “Yeah right, might as well ask Aishwarya Rai out”?

Well I think it is not as crazy an idea as it sounds at first. This could actually be a Win-Win situation. Unlike my date with Aishwarya, I might add. :-)

What if we replace Income tax on salaries with a “Salary Distribution Tax”?

The way it would work would be by shifting the burden of paying the tax entirely on to the Employer in the form of a tax on the wage payout. Say a 10% Tax on the total wage bill of the employer.

The idea is to make the whole process simpler for the employee while ensuring the exchequer does not lose out.

For the employee the immediate benefit is WYSIYG. His take home salary converges to the salary mentioned in the employment letter. (Of course the salary mentioned in the employment letter would now be more realistic, read a bit less than before.) No need to run to the CA to file tax returns. No medical bills to be “arranged” for, no rent receipts to be forged, no Form 16s to be obtained. The tax authorities do not have to deal with the mountains of returns that they do every year.

Moreover the employee feels deliriously happy under the mistaken belief that there is no tax to be paid at all.

Can the tax authorities do it? Sure they can. After all they have done the same with dividends, when all that the government did was to shift the burden on to the company in the form of a dividend distribution tax. The result of this distribution tax was lower dividend for the shareholders (to the extent of the tax). But who looks so deep?

With this one stroke of the bureaucratic pen the then BJP government convinced a large number of retail investors that dividends distributed by companies are tax-free. Retail investors “felt good” that they no longer had to pay a tax on dividends.

Why not make the salaried employees “feel good” in the same manner, this budget?
Authored by Sameer Nair


Compulsive Objectivist said...

Good article. Funny:)
In India, people want to get away without paying anything. The consequence is the shitty environment that we have created. This chalta-hai attitude will one day haunt us in a bad bad way.

Abhinav Aggarwal said...

Am confused by the above comment from "compulsive objectivist". I thought the article was thought provoking and interesting. I somehow failed to get the overt humour in it. I agree that there is a widespread attitude in India to not pay and want to get. That's the real beauty of the author's point. There is no tax exemption being talked about merely a shift of responsibiliy from the employee to the employer. Employee ends up feeling great that he suddenly has "tax-free" income, exchequer still gets the money.

This is already happening to a limited extent presently with employer's deducting TDS, etc. Except the proposed "reform" would reduce paperwork. The author makes the parallel to tax of dividend where the onus was simply shifted onto the corporate issuing the dividend.

samarora said...

Thought provoking and timely. This will help reduce the vast disparity between the fiscal "haves" (read: businessmen, farmers etc.) and the "have nots" (read: salaried people). For a salaried person, his effective contribution to the exchequer is more like 45-50% - since he is paying indirect taxes (excise,sales tax, VAT, Octroi, Service tax, luxury tax, entertainment tax, airport tax etc...) on all his essential spends from his post tax income. Most business people (atleast the ones with smart CA's) manage to classify a lot of these essential spends as "business expenses" and end up with a much lower effective tax rate. A bold move such as this would make India a leader in tax reform as opposed to being a slow follower (e.g. We hope to match ASEAN in 5 years, EU in 10 years.. blah...)

Arun said...

Thought Provoking Article...

MoCha said...

This is a simple and elegant solution to simplify life for everybody. This also goes with the FM's stated direction of removing exemptions thereby making tax calculations standard across all individuals. The lower amounts of paperwork might give the taxman time to go chase the "big fish".