There is a need to transform the personal income tax system but did the Budget go far enough?

On the face of it, the new income tax slabs might have seemed like a slight saving window, particularly for younger earners. While this seems to be the result of a report on changes to the Direct Tax Code submitted to the Ministry of Finance last year, the public is yet to see it. There is little doubt that the income tax code for most taxpayers — and India has far too few direct taxpayers — is very complicated with several exemptions added over the years, from housing loans and children’s tuition to tax-saving investments. While the list of exemptions allowed higher-income earners to defray their taxes significantly in some cases, it also promoted a culture of investments, particularly among younger salaried earners, who otherwise might not have done so. That said, a simplified tax code with lower slabs will help younger earners save some money. But will they make the shift now because they will not be able to return to the old regime where they could avail exemptions when they get older, earn more and start a family? Far from simplifying things, young earners will need to talk to their parents and to tax experts to figure out which path they should take. Robert Frost might have chosen the road less travelled but is it worth spending some money today to make more later?

The question, however, is will it? Is this slight reform an indication of what direction the Government wants to move in, a future with fixed income tax slabs and minimal exemptions? While that might make things simple, any Government must realise that encouraging investments by younger earners is also a positive that it should not forego. Strangely enough, while studying the new rates, it appears that senior citizens, who have dividend and interest income, might be able to take more advantage of the rates than younger people. There needs to be a direction that the Finance Minister and her officials need to give income tax payers and not just a tax charter. Is the direction towards lower rates with fewer exemptions going to be a one that this Government will stick to? After all, it is safely ensconced in power until May 2024. Thankfully, the Government has refrained from an overnight changing of the rules. Lessons might have been learnt after demonetisation but it would be a start to make public the reform recommendations to the direct tax code.