The imposition of an additional three per cent surcharge on income tax and the reduction of tax incentives for savings in Yashwant Sinhaís budget will pinch the salaried sections more than anyone else.
Indeed, the budget will milk the salaried sections dry, not because there are no cows in the country, but because these are the only ones Sinha has decided to milk. So every time he needs more revenue, he decides to take more from the same people.
It is true that more people have been brought into the tax net with the one-by-six schemes, but they have not been made to pay more taxes.
The latest Economic Survey reports that compliance among non-salaried income-tax-payers remains low and that better systems are need to improve compliance of higher income-tax-payers.
It also said that whatís needed are improved systems to enforce compliance such as modernisation, extensive use of IT, data warehousing etc.
Instead, Sinha chose the easy way out. A true commitment to reforms would have meant making improvements in tax administration that would have increased the tax burden of those who are not complying.
The salaried tax-payer does not mind making sacrifices for the country when required to. But the more you take away from the honest citizen, the more you are letting the dishonest get away with.
Unable to avail of rules and exemptions that the self-employed can and unable to show various items of expenditure such as entertainment as costs, the salaried sections are among the highest tax-payers in terms of the proportion of income they pay as tax.
This introduces inequity in the system i.e. people earning the same amount are not paying the same proportion of their income as taxes. Any increase in tax rates without an increase in compliance increases the inequity.
And, that is why the budget should have been tax neutral for the salaried sections. But that is not what Sinha chose to do. Indeed, he chose to ignore expert advice on this.
Let us, for instance, look at one reform. Yashwant Sinha has reduced tax incentives for savings under Section 88. The rationale for reducing them was that tax incentives for small saving schemes were given at a time when financial savings of the household sector were low.
They have now outlived their usefulness. Fair enough. But Yashwant Sinha could have changed the tax slabs so that the move was tax neutral. In fact, thatís what had been proposed to him.
Parthasarathi Shome, who headed the committee on direct taxes, had proposed a removal of tax benefits. But he had also proposed that since prices have risen over the last 25 years, it made perfect sense to change tax slabs so that tax rates were not hurting people more every year.
The committee had recommended that rates of 10 and 20 per cent should be applicable for incomes upto Rs 1,00,000 and Rs 2,00,000 respectively, and a rate of 30 percent for income above Rs 2,00,000. But Sinha chose to ignore this advice.
Second, he should have retained tax incentives for long-term savings. And, again, that is what had been proposed to him. The Y.V. Reddy Committee had recommended that tax incentives for long-term saving instruments such as the Employees Provident Fund, Public Provident Fund and Public Pension Fund may continue to be provided.
These are old age security schemes and should be encouraged. Raising tax rates rather than broadening the tax base is not a strategy that will pay off in the long run. After all, how much can you take away from people with limited incomes?(The writer is Senior Fellow, Indian Council for Research in International Economic Relations)