People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)

Vol. XXX

No. 27

July 02, 2006

Clampdown On The Salaried People


K Veeraiah 


THE ministry of finance has put out a circular on the Internet seeking public opinion on the continuation or removal of various exemptions, which are under implementation, in the Income Tax Act. In the name of simplifying the tax laws and reviewing the various exemptions, the ministry is seeking to withdraw certain tax exemptions that have been somewhat helpful to the salaried people. In fact, this was the mandate of the Kelkar committee from which the finance ministry drew its moral basis. It also proposes this on the plea that the present government is committed to increasing the tax: GDP ratio. 




There is a flaw in this kind of move to seek comments from the public. The circular was posted on the web page of income tax department asking the people to react upon it, even though Internet is not so easily accessible to every person. Therefore, those who have access to Internet and are familiar with the browsing can read the contents and may possibly react to that. But a large section of government employees who are working in rural areas are not in a position to send their comments on that. This is the basic drawback of the mode the government has adopted to seek public opinion.


The circular goes on narrating the number of income tax exemptions that are beneficial to the salaried employees. Out of a total of 162 exemptions listed out, 54 are directly related to the employees and other salaried people. But there is not even single indication that the government would like to review the so-called excise and customs duty exemptions rendered to Indian and multinational companies. The Kelkar committee, which had gone into the ways and means of strictly implementing the FRBM act, suggested an improvement in tax collections, instead of imposing new taxes on the neo-rich. And now the government wants to remove whatever little advantages the salaried people has had so far. 


The whole logic of the Kelkar committee is based on the perception that there is hardly any evidence to prove that tax incentives have per se increased investment or savings. But the fact is otherwise. Pranab Mukherjee, once a finance minister and at present the defence minister, once informed the parliament that the incentives were provided to encourage savings and get them channelled into productive investment. The quantity of savings can be understood from the investments channelled either to the public sector or to the private sector in the early 1980s. But the Kelkar failed to explain how billions of rupees are coming as deposits to the banks and in other modes of instrument. Based on its flawed understanding and on the plea of simplifying the tax administration, however, the Kelkar committee proposed an across the board abolition of incentives for savings. Not only that, the taskforce constituted for the purpose is also of the opinion that decreasing the quantum of tax incentives automatically translates into tax expenditure. The net result of these proposals is a widening of the tax net downward to bring under its purview more assessees in order to augment the tax income. And with its recent circular, it seems, the government has concurred with the line of thought adopted by the Kelkar committee.




The current provisions under the Income Tax Act exempt the income accrued to a person through the LIC policies, leave travel concessions, HRA, other savings and allowances he is getting by virtue of his service. Now the finance ministry, however, wants to count all the income from these sources in order to assess the taxes. The savings, which crores of employees and other salaried people have been investing, are used as reserve money to carry on the developmental schemes and polices. The present exemptions in case of PF and LIC premia are of a historical nature and were given to encourage thrift and savings so as to mobilise indigenous capital for economic growth. In the beginning of economic reforms, the government exempted the income up to Rs 5 lakh through the so-called voluntary retirement scheme (VRS) in order to persuade employees to opt for VRS. Now that too is under consideration for taxation. Income accrued to the trade unions, political parties, including the salaries and allowances of MPs and MLAs, and to some trusts, has so far been exempted from taxable income. Till recently, the housing loans were exempted so as to promote the housing activity. Now all of these are under the government’s scanner.


Let us remember that it was due to these concessions that the savings rate has been at the level of 22 percent or above even in the worst period of economic growth in the post-1991 period. This formed considerable part of the indigenous capital mobilised by the government for its plan activities. Our tax system is a savings based one and it is well recognised that tax rates do affect the economic behaviour of taxpayers. With this step, it seems that the government wants to change the course from a savings based to a consumption based tax system. If a person wants to save a part of his earnings, first of all he would look for a credible organisation and the ways to invest. So far in our country post office deposit schemes, National Savings Certificates and fixed term deposits in nationalised banks have been the most preferred investment options, followed by insurance policies. With these investments, moreover, ordinary people in a real sense lend money to the government at a minimal interest rate. 


Another aspect of these savings mechanism is that these are controllable by the savers. Whenever a saver wants to withdraw his money, he can do so with ease. Now by withdrawing all the concessions on the savings the government is pushing the common man to invest in speculative markets --- whether in stocks or mutual funds --- or in real estate business. 


There are two drawbacks here from the point of view of the investor as well as of the government. Once a common man invests his savings in the market driven speculations, he would get bound by the market determinants, instead of having his own choice. If he invests in the shares of a particular company and if that the value of those shares goes down because of speculative activities, he cannot sell them as and when he wants. Thus his will be under the control of market forces, instead of his own control or the government’s control. This not only affects the individual savers, but also the government’s finances in the long run. 


Yet another trend emerges out of this market driven or consumption driven investment behaviour. This is a prelude to the development of fast track, modern retail business in the country. The study commissioned by the ministry of food and consumer affairs on the question of FDI in retail markets also suggests the same. Various studies in the consumption behaviour of Indian consumers have suggested that due to the savings based tax regime the ordinary Indian consumer is not able to have sufficient sums of money in his hand to satisfy his interests as a consumer. The present circular, seen together with this kind of studies, raises doubts about the government’s attitude toward the FDI in retail market. 


Coming back to the issue of savings, a big part of the monies saved by the Indians is not really saving as such, in the sense of excess money in their hands over and above their daily needs. The Indians save a certain amount by sacrificing even their basic necessities in order to be able to meet any unexpected expenditure in the family in future.


Here comes the question: Is that the only way out for the government to meet its requirements? The answer is a big NO! Some time back, the Left parties submitted a note on resource mobilisation for the government’s consideration. It says the direct taxes collected from the wealthy brass is around 25 percent of the GDP in all industrialised countries and also in the countries called East and South East Asian tigers. But the same has not gone beyond 10 percent in our country. Not only that. According to the finance ministry’s assessment, tax dues amounting to Rs 96,000 crore are from the “driving engines of economic growth,” ie the Indian giant industries. At the same time, the latter also enjoy various tax exemptions of huge magnitudes. For example, various tax concessions accorded to the Reliance Industries come to around Rs 1200 crore. Instead of pondering over the suggestions made by the Left parties for resource mobilisation, the government’s intention is to clamp down upon the salaried people.


Surely, this proves the reality of the slogan that the “Cong’s Hath Aam Admi ke Sath”(The Hand of the Congress is with the Common People).