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

by Manshu on June 5, 2014

in Uncategorized

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. 

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