One income tax change that the Narendra Modi government needs to bring

I don’t know how many readers will recognize this headline, but it is just one word changed from a recent headline in an ET article. The article in question talks about six changes they’d like to see and going through that article reminded of the very first draft of the Direct Tax Code which came out in 2009.

That draft was the best draft of DTC that came out, and it was great for its simplicity and potential effectiveness. It proposed the following tax slabs which I thought was one of the best things about it.

  • Up to Rs. 1,60,000 – Nil
  • Rs. 1,60,000 – Rs. 10,00,000 – 10%
  • Rs. 10,00,000 – Rs. 25,00,000 – 20%
  • Above Rs. 25,00,000 – 30%

If there is just one change I’d like the government to make, it will be this change. Raise the tax slabs for almost everyone, and let people benefit from the lower taxes.

However, this is a simplistic view because it doesn’t tell you where the shortfall is going to be met from and that is a problem because the Indian government isn’t exactly loaded with money.

What I would do is get rid of all tax exemptions under Section 80C and save the government some money there. I think this will be very good for most people whether they know it or not, and in most cases they wouldn’t actually know it.

In looking through portfolios of several people along the years, I’ve realized that the number one cause for problems is buying tax saving products towards the end of February and March. When the taxman comes knocking, they reach out to their relatives and friends in a bid to buy something that will save tax.

Usually, that something is sold to them, and that something has got high commissions, opaque returns, and long lock-ins. The beauty of this combination is that it allows you sell the same crap year after year without the customer understanding what’s going on.

This is a really big problem, and people are losing a lot of money because of it without realizing it, and in a lot of instances the entire category of financial products is getting a bad rep because of this, and then people are just turned away from everything altogether which makes the situation even worse for them.

I changed the one word from that headline because I felt the solutions that were being proposed there and elsewhere don’t attack the root of the problem and maybe to some extent even extend it because they don’t offer simplification and removal of the poor incentives that exist in the financial industry today.

Update: Corrected tax rate for the above Rs. 25,00,000 slab. 

18 thoughts on “One income tax change that the Narendra Modi government needs to bring”

  1. Sir
    I have not recevied any reply about insurace companey action to
    be taken to my mail ID
    and i have recevied your mail for confirmation to click on link
    but when i click it opens rediff site again
    Thanking you

  2. Dear Sir,

    I have invested Aviva Life insurance Year 2007 Rs. 48000/-per anum
    for 3 years as per therir rep. after that i stoped paying they sent remider
    to me . But i have not paid as per their Rep. but 5 th they closed policy
    with out my requst Aginst Fund Value 146000/- sent Rs.93000/-
    I have sent so many letters and complaint to IRDA but no respones from
    IRDA also I was schocked Know i want help from you to recover my
    amount atleast.
    Thanking you


  3. It is reported that Indian Middle class is competiting with US middle class. We never hesitate to buy luxury cars,apartments,cellpone, dine at luxury dhabas,give educations to our wards at premier public schools. So we must be prepared to pay more tax.Govt should not compromise on receipt side for sake of better economy,infrastructure

    1. Not sure if I understand what it means to be competing with the US middle class, that is probably more of a catchy thing to say rather than have any real substance.

  4. One of the reasons for hybrid insurance/investment products (with high commissions) has been the tax exemption of insurance premiums and allowing investment products under IRDA.

    There was a regulatory argument between IRDA and SEBI a couple of years back about this. SEBI wanted to regulate all investment products and IRDA should have been regulating only insurance products, but it seems that IRDA had its way and this didn’t get done.

    Either the tax exemption should be for a pure insurance product or it should be done away with or both SEBI and IRDA should regulate hybrid products.

    1. Just to clarify, when I go to a bank, they always offer me investment products with an insurance component thrown in. When I asked why does it need an insurance component if it is an investment product, they told me that it is because the product can be claimed under tax exemption for insurance products. If you look closely, part or most of the tax benefit is actually negated by the high commissions and it is pocketed by the product salesman.

      1. I think that argument did good to bring these problems to the fore and the ULIP products were reformed to a good degree after that. There is still a long way to go though, and I hope in the coming years we do a situation where insurance products are actually useful as an investment.

  5. I appreciate your viewpoint

    Had I been the Finance minister, considering the shortfall in tax collection – I may not have much changed the tax slabs but rather increased the limit under Section 80C from 1 Lakh to 3 Lakh for the following reasons:-

    1. It inculcates a habit for forced savings for the common man (which youth is not doing these days)
    2. These funds could have been allocated by the govt in the right direction like Infrastructure etc.

    Now lets see how Arun Jaitley restructures the Income Tax Act. Fingers Crossed 🙂

  6. Hi Mr Verma,

    Sorry but what is that you want to convey in this article? You first talked about shortfall for government and then went onto explain about tax saving adventurism adopted by people. How is government going to met the shortfall? Please elaborate.
    Also, i think there is some error in the tax slab you have posted. above 25 lakhs how come nil tax??

    1. Only 3% of the population pays taxes. Surely that needs to expand and should be the main way to increase govt revenue. Not only does it increase revenue, but reducing black market transactions will go a long way in reducing financial crime and fraud as well.

    2. Yogesh, what I wanted to say was if they were to do just one thing then they can look at changing the tax slabs. This tax slab is more liberal and a cause of that will be lower revenues for the government.

      So, how does the government increase their revenue? They can do this by removing the tax benefits they give on various products under section 80C because these so called benefits actually cause tax saving adventurism as you call it and end up being more harmful for people than being useful.

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