The Hindu Business Line : Tough going for salaried class

THE Budget-making exercise has started in right earnest and, once again, the portents are ominous for the salaried class. The system of EET — Exempt, Exempt, Taxable — is likely to be introduced, and will only lead to an increase in tax incidence for the salaried class.

In the name of rationalisation, the Finance Ministry has, over the years, only sought to increase the burden on the salaried class. As fiscal deficits increase, the temptation to flog this uncomplaining horse has only increased.

The Government is in a fiscal bind and cannot be expected to be sympathetic to salary-earners. It is only fair that employers take note of the changes, being in a better position to appreciate the changes in tax incidence and their impact on employees.

Rising burden: Over the years, there has been a spectacular fall in the yield on many tax-saving instruments. Inflation, though, has not declined as much. The difference between the yield and inflation, referred to as real yield, has declined dramatically.

Tax benefits on insurance products such as Bima Nivesh were cut to size. The tax rebate, too, was reduced. Service-tax on term insurance component was introduced. Consequently, returns on tax-saving instruments have declined so much that it is debatable if they make investment sense any longer.

The coupon rate on provident fund too has come down. Tax has been imposed on contribution to superannuation funds too. The insidious Fringe Benefit Tax has indirectly increased the tax incidence.

Over the years, the salaried class also had to endure other surcharges.

In this backdrop, EET looms as yet another sword over the taxpayers' heads. What it will do is reduce tax rebates. Tax will now have to be paid at the time of maturity of a tax-saving investment. Technically, it is possible to keep postponing the tax incidence. However, since there will be a limit on the amount that can be invested each year, there is no way you can postpone the tax incidence beyond 10 years. That too, only if the present limit of Rs 1 lakh for investments is enhanced. If it is not, then tax incidence would eat into income even earlier.

There have been silver linings such as the deduction for interest on housing loans and virtually no tax on investments in equities made directly or through mutual funds. If you had little surplus to invest or to take a loan to build a house, these sops have little meaning.

Besides, successive committees have been calling for doing away with tax deduction on interest paid on housing loans too.

Are Indians done in? Prima facie, it may appear that the tax rates in India are not very high. After all, in many European countries, the maximum tax rate is higher than 30 per cent. The maximum tax rate is, however, applicable only to a significantly higher level of income.

For instance, in the UK, the rate of 20 per cent is applicable only on income above the equivalent of Rs 1,50,000. From Rs 1,50,000 to nearly Rs 24,00,000 the applicable tax rate is 22 per cent. In India, the 20 per cent tax rate is applicable on incomes exceeding Rs 60,000, while the 30 per cent rate is applicable on incomes exceeding Rs 1,50,000.

In addition, our income-tax rate slabs have not been adjusted for inflation for many years now. The Kelkar Committee on Direct Taxes observed that the existing corresponding income (tax slab) levels of Rs 60,000 and Rs 1,50,000 are susbtantially lower than the inflation-indexed levels — thereby resulting in an increase in the real tax liability.

Of course, this committee had also suggested that the perception that the effective tax burden on the salaried class is higher is not borne out by facts. This argument was based on the opinion that tax laws concessionally treated many perquisites. Fringe Benefit Tax has now more than fully plugged that loophole. Standard deduction, too, has been removed. Now, adjusted for inflation, the tax burden on the salaried class has indeed gone up.

Employers to the rescue: Given the constraints facing the Government we cannot hope for reduced tax incidence. It is only employers who can take note and do the needful. Tax on salaries needs to be viewed as an expense of the employer. Accrual net of tax is the actual compensation received by employees. Growth in compensation each year would need to be pegged to this parameter.

In addition, the Government has given the corporate sector many incentives in recent times, including marginal reduction in corporate taxes. The reduction of tax on long-term capital gains to virtually zero and reduced tax incidence on dividend distributions would also have benefited most companies and their promoters. The economy, too, is on an upswing.

The onus is thus on the corporate sector to share the value added. The salaried classes have already seen some of the benefits trickling in. Employee costs have risen 10-15 per cent for most companies over the past few years. If the economy keeps growing at a reasonably fast pace, we can expect salaries too to keep rising. Only that can counter the tax effect.

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