Click to play videoNew Delhi: With Prime Minister Manmohan Singh hinting on fewer tax exemptions there could be taxing times ahead.
At a function on Monday, the Prime Minister had said that in the long run, India’s tax regime should not have too many sops as they make tax administration too complex and vulnerable to misuse.
The question under discussion on CNN-IBN’s Face The Nation was: Should exemptions continue in a country like India?
On the panel of experts were chairman of AMFI, A P Kurien, chartered accountant, Shailesh Haribhakti and managing director of Kotak Life Insurance, Gaurang Shah.
With India ranked as one of the lowest in tax penetration, is insurance still something in India that is bought to save tax?
According to managing director, Kotak Life Insurance, Gaurang Shah, “Insurance is still to a large extent supported by the tax benefit. The average size of the policy is Rs 25,000 and the 80 C exemption limit that is combined for the six or seven other instruments together is Rs 1 lakh. So we see that the tax exemption is also driving the policy size. There are two sides of an insurance plan. One is protection, which people still buy even if there is no exemption, as they need protection from mortality and morbidity. But they will buy the long-term saving only if is supported by some sort of exemption.”
Chairman of AMFI, A P Kurien had asked for more tax exemptions. When the Equity Link Saving Schemes (ELSS) was offering a limit of Rs 10, 000 nobody bought them, but this year about Rs 10,000 crore worth of ELSS was sold.
However, to India’s percentage of household savings going to mutual fund being the lowest in the world Kurien said, “One should look at tax exemption in a broader way. Tax exemptions are given firstly to enhance the quantum of series in financial assets. Secondly they are given to direct savings to a desired advisable channel. It is necessary to enhance the quantum of savings in financial assets. So the financial instruments for a long time in many countries including India get tax exemptions and break. Mutual funds are an incentive for a common man who cannot the approach the capital market and put his savings in equities to channel his savings to a desired destination namely the capital market.”
Dual burden
It would be prudent to plan your investments with tax on mind. But the salary class in India is over taxed.
According to chartered accountant, Shailesh Haribhakti “We are faced with a dual burden of compressing the fiscal deficit so we must have a simplified and a clarified taxing system as people have reacted better to simple low tax regime. While starting with getting into the habit of doing investments and savings based on fundamentals, we should try and compress the exemptions and reduce the tax rates. Tax rates should be reduced concurrently with exemptions.”
With school fees and a long-term pension plan being put together under 80 C, are we being exempted more than required?
“The ideal situation should be that the tax rate be dropped by 10 per cent and the exemptions fully removed. It is possible for us to have a six-page tax law, which would be very beneficial on a macro basis for the whole country. There could be a one-page tax return for a country, which pays the Goods and Services Tax (GST) uniformly and one rate of tax which everybody happily pays,” said Haribhakti.
“You may have an omni-wealth provision like you have 80 C with Rs 1, 000 as exemption. But the instruments that have been clubbed together are two or three years instruments like bank deposits then you can split them up into two parts for example seven to 10 years’ savings, as we badly need long-term savings. We have a nation of savers of short tenure,” said Shah.
“The ideal situation according to me should be the implementation of tax neutrality. However, that should be across all instruments. In the tax neutrality situation the rate of tax comes down substantially and no instruments have any exemptions. For a country like India, which has different social set-ups and requirements, there is need for directing savings to decide channels where a tax neutrality regime, but that could not be practicable. But we can look at sectors and areas which need incentives to promote savings for better social status,” Kurien opined.
However, taxes have been exempted in areas including school fees, homes and equities retirement.
“In a nation with so much of plurality, it is very hard to judge who will react to what in what manner. The co-relation between tax incentive and savings behaviour will start becoming negative. The reaction to a reduction in tax rates will give a huge rise but it has to be coupled with simplicity and comprehensiveness of the tax regime. No body should be exempted. Everybody who earns an income in excess of a certain sum must be taxed,” Haribhakti said.
Is the salary class over-taxed in India?
“The salary class is absolutely over-taxed and they are the group who have no way to create shelters through mode of planning. They are the largest mass of people who are paying the highest tax, but have the lesser ability to bear the tax. If every body is given a chance to spend and save in a way that they believe is best for their circumstances with the tax rates being reasonable and the entire economy brought under the tax rate, then there will be a hugely improved transition from indirect taxes to direct taxes. All income will come under the tax net and correct tax will be levied in a simple painless manner for the common good,” Haribhakti opined.
So should tax exemptions actually continue in a country like India?
“No, we are not asking for more exemptions. But if you take the current situation of non-tax neutrality instruments of savings in the market, then the exemptions should be recalibrated to the emerging situation,” said Kurien.
“What the Prime Minister stated is going in line with our stated policy objectives of having lesser concession, lesser administrative hassles and more moderate taxation and better compliance. We have seen that being effective,” said Sharma.
“I am absolutely in favour of the Kelkar Committee’s recommendations that went for one rate of tax, which was of single and simple system and taxation for everybody,” Haribhakti concluded.
Final SMS Poll results: Should exemptions continue in a country like India?
Yes- 90 per cent
No- 10 per cent
(For updates you can share with your friends, follow IBNLive on Facebook, Twitter and Google+)
displayed with permission. Use of the CNN name and/or logo on or as part of CNN-IBN does not derogate from the intellectual property rights of Cable News Network in respect of them.