As the budget rolls in, there are a few things we think would be cool if they came through. Not all of the following are likely or even part of the government thinking, but it’s what we would like for the future.
Increase “no-tax” slab to Rs. 500,000, remove all 80C exemptions
In the economic survey we have a very interesting graphic. 
What can we see here:
- There are 286 lakh (2.8 crore) taxpayers in the country (2014 data)
- Only 25 lakh (2.5 million) taxpayers make more than 10 lakh rupees per year.
- Most taxpayers (207 lakh) make less than 5 lakh rupees per year. That’s 72% of all taxpayers that make less than 500,000 rupees a year.
Lowest Slab Taxes are Irrelevant – Remove Them Completely
At the lowest slab, the taxation is as follows:
- Upto 250,000 is tax free
- From 250K to 500K (2.5 lakh to 5 lakh) you pay 10% tax only.
- The 250K limit increases to 300K if you’re 60+, and goes to 500K if you’re 80+
Since the majority of taxpayers are in this bracket – 72% of them – and there is a cost to filing/collecting taxes, the government can do something radical: Completely eliminate income tax below Rs. 500,000
What’s the Impact?
Remember, there are 2.07 crore people that make less than 5 lakh rupees per annum.
Since the average income of taxpayers making less than 5 lakh rupees is Rs. 2.9 lakh (from the graphic above), let’s also assume that half these people are making more than the average, and half are making less. That would mean about 1 crore people making more, and about 1 crore people making less.
If you’re making less than 2.9 lakh per year, your income tax is negligible, since the first 2.5 lakh is non-taxable. Even at Rs. 2.9 lakh rupees, you would be paying only Rs. 4,000 in tax. (10% of whatever is above Rs. 2.5 lakh) Since you have to account for a spread, assume Rs. 2000 per person, for 1 crore people = Rs. 2000 cr. for the tax collection of the “under average” people earning below 5 lakh.
Assume the remaining 1 crore people are earning Rs. 500,000 per year, the max that can be earned in this slab. The tax on that would be Rs. 25,000. (10% of whatever is above 250,000). Again, assume an even distribution, and you might find that the average tax paid will be between Rs. 4000 (lower end, at 2.9 lakh) and Rs. 25,000 (upper end at Rs. 5 lakh). The average is Rs. 15,000 tax paid per person.
For 1 crore such people, tax collections are a maximum of Rs. 15,000 crore, as the tax collected from “over average” people earning less than 5 lakh.
Add them both: the below-5-lakh-income tax collections are a total of Rs. 17,000 cr.
This is however simplistic: we will also find that removing the first 500K will impact all taxpayers having an income of MORE than Rs. 500,000 also.
There are 79 lakh people with income more than 5 lakh. Each such person pays Rs. 25,000 for the “lowest” slab as part of his or her tax. The government will lose that income also – and that adds up to about Rs. 20,000 cr.
Add them all up – if the government removed all taxpayers paying less than Rs. 500,000 from paying any tax, the government would lose Rs. 37,000 cr. in tax collections.
Let’s Make It Up: Remove all 80C exemptions
Section 80C allows you to “deduct” certain kinds of expenses or investments from your taxable income. This currently includes a lot of things – your children’s education fees, your housing loan principal, investments in insurance policies or in equity taxsaver funds, PPF etc. All of them, put together, are limited to Rs. 150,000 per year.
Since the government will have increased the lowest slab from 250K to 500K, essentially another 250,000 of income is totally exempt,
If the government completely eliminated 80C exemptions (which are limited to 150K anyhow) this is still a big positive for every tax payer.
Under section 80C the government sees potential exemptions of Rs. 29,237 crore in 2014-15. (Link)
That means the government will not see that loss if 80C is totally removed!
The net tax impact is: Rs. 37,000 crore income lost minus Rs. 29, 237 cr. income gained = around Rs. 7,000 crore loss.
Update: Thanks to what reader Pras said, even this can be removed. Consider that taxpayers making more than 10 lakh rupees now suffer – they pay Rs. 25K less tax (due to no 10% slab between 250K to 500K) but they lose all the 150K benefit of the 80C, which would have saved them 50K of tax. So they net pay Rs. 25K more in taxes!
There are 24 lakh such people with 10 lakh or more as income. Assuming all of them pay Rs. 25,000 more in tax due to the above, we have Rs. 6000 cr. extra collected in taxes.
The total income tax impact then is Rs. 1,000 crore only. (Rs. 7,000 cr. above minus the extra Rs. 6,000 cr. collected). And I haven’t even mentioned the savings in tax collection costs yet!
And There Are Other Gains
80C only applies to individuals, as does the Rs. 500,000 slab, so there is no corporate tax impact.
There are huge gains made by lower collection costs:
- 72% of taxpayers don’t have to pay tax. That’s a significantly lower tax collection burden on the tax department
- No 80C means significantly lower tax filing issues – everything is straightforward – and therefore tax scrutiny of such tax exemptions etc is no longer required as is none of the associated paperwork
These two alone can result in lesser costs that will reduce that net impact by half. And then you have that many happy taxpayers for whom the net impact is positive!
Some of us will hate it
Of course removal of exemptions is hated by people. How will we encourage equity investments? Why tax insurance investments? etc.
My principle is that if you have lower exemptions and a lower tax rate – which is what I propose – we will significantly reduce the bullshit around tax that we have to be doing. It will hurt CAs and accountants but will in effect allow them to serve more people rather than dealing with the complexities of a few.
The Summary: What Are We Saying?
Make the income tax slabs:
- Below Rs. 500,000: no tax. (Can give some higher limit for >80)
- From 5L to 10L : 20% tax
- Above 10L: 30% tax
- Remove all 80C exemptions completely
This will probably have a very low impact on tax collections (less than 7,000 cr. ) and save tremendous costs in collection and scrutiny.
Note: Please do comment. I will only delete personal attacks, no other comment will be censored.
