Only 3 per cent of over 1 billion people in India pay income tax, so it’s not surprising that the salaried class often complains about high taxes. Accountancy firm PricewaterhouseCoopers (PwC) found in 2014 that the take-home salary of a high earner in India is less than that of salary earners in many developed countries like UK, Canada and US. (Read)
Individuals earning as little as Rs. 21,000 per month have to pay taxes, according to current income tax rules. Unsurprisingly, there’s a consensus among tax experts that the government should increase exemption limits on several kinds of allowances to reduce the income tax burden on middle class.
Former Finance Minister Yashwant Sinha told that he had recommended the exemption limit for personal income tax to be raised to Rs. 3 lakh per annum in 2012.
More importantly, Mr Sinha, as the head of the parliamentary standing committee on finance on the Direct Taxes Code Bill, had recommended that the exemption limit on income tax should be linked to the cost of living.
“Just as government employees get Dearness Allowance (DA) based on the cost of living index, similarly this threshold (exemption limit) should increase automatically based on cost of living every year. Then nobody will crib, nobody will say that prices have gone up and my income remains the same, and I am paying more taxes,” Mr Sinha said.
The DA is a cost of living adjustment allowance paid to government employees and is calculated as a percentage of basic salary to ease the impact of inflation on people.
Analysts say Mr Sinha’s suggestion to link the exemption limit to cost of living is an effective way to reduce the tax burden on salaries employees and should be considered by Finance Minister Arun Jaitley.
The Direct Taxes Code Bill sought to replace the 60-year-old income tax law. But it is unlikely to be implemented as Mr Jaitley last year said that most of the provisions of the proposed code have been integrated into existing tax law.