The Indian Income Tax Act – need for indexation

The Indian Income Tax Act is a legislation that nobody likes or respects.  It must be the most hated and disliked financial legislation in the world.  The reasons for that are many:

1. Selective applicability — those with large values of agriculture income totally escape the income tax net while those who are employees in Industry get totally covered thru Tax deduction at Source provisions.  You have both tax deducted at source and tax collected at source provisions;
2. The numbers of income tax payers is a small % of those who have taken PAN #s (Permanent Account Numbers).  There are lakhs of PAN card holders not paying income tax or filing Income Tax Returns;
3. There is no mechanism to catch the several self employed persons with significant income — they may or may not have PAN #s but certainly they are not filing income tax returns or paying advance / self assessment tax;
4. For individuals the payment of income tax has been made more cumbersome by ‘old’ and ‘new’ method of income computation, where certain types of investments are permitted or not permitted depending on an individual’s choice of method of income tax assessment.  There are numerous articles which will come pre and post Budget presentation on which method is beneficial at what level of income etc.

Frankly, the above puts off an individual filing his Income Tax Returns.  A great antipathy towards income tax has developed in the mind of the average income tax payer.  

To soften the blow felt by salaried employees / retirees / pensioners – The finance ministry may consider the following proposals.  We are aware that the workings for Budget 2024/25, must be largely frozen, considering our finance minister is expected to present the Budget later in July ’24.  

A major criticism against the current finance minister who has held that position for 6-7 years is that she has not really given any additional exemptions from income tax or raised exemption limits during her long tenure as finance minister.  That criticism is justified and the middle class income tax payer has reason for feeling short charged.

When the finance minister presents her budget for year 2025-26 (Year 2 of the current government), she could do well to pay attention to the below:

•  Sharply increase the exemption limit for income tax payers.  India is now facing the problem of declining consumption.  The only way to combat declining consumption is leaving more money in the hands of the tax paying consumer.  Either consumption or investment will occur with the money (due to lower tax charge) and both investment and consumption are the need of the Indian economy today;
• There is a need to reduce the public spectacle and tamasha that India budget has become.  Everybody glued to the TV or radio to listen to what is being spoken.  Often, the budget fine print in the paras, make the provision quite different from what is understood when listening to the finance minister.
• The budget 2025-26 must take a view on Para A above.  There is a need to sharply increase the exemption limits.  That will hopefully do away with the Income Tax Payer being boxed into 3 buckets – regular, senior citizen (>60 and upto 80 years) and super senior citizen (80 years and more).  There is really no reason for this differentiation if the tax free income limit is sharply increased (say 4 times the existing limit for regular tax payers).
• For individual tax payers the finance minister must not keep tinkering and amending tax exemptions and tax limits.  Work out a structure that is relatively fair for Year 2025-26 (Year 2) and for Years 2026-27 (Year 3), 2027-28 (Year 4) and 2028-29 (Year 5), index the amount which is Income Tax exempt.  Say for year 2025-26, the exempt income level is fixed at Rs 20 lakhs – thru indexation the limit for Year 2026-27 could be Rs 20.75 lakhs, for year 2027-28 Rs 21.75 lakhs, etc.

This way without making any changes in Income Tax provisions / exemptions / deductions – the income tax payer gets an inflation and tax shield which at current currency value protects his Income from Tax.

The finance minister needs to seriously consider giving the benefit of Indexation so that the entire period of governance (5 years) – there is income tax stability and fair play with the tax payer.  Of course, the relevant index will need to be made and there is sufficient 8 months to make out the index.

The first job of the finance minister is to remove the bad name that Income Tax has gotten in India.  Nobody likes to pay tax but when you are consciously differentiated against, the pain is much greater.  Also, a better quality sample size will result in better income tax collection.  Indexation should address some pain of the Income Tax Payer combined with a higher taxable income baseline.

The above is not difficult.  Needs acceptance at finance ministry level.