Advisory Firm EY Wants Indian Govt to Tax Professionals & Employees Equally: Finance Ministry Rejects the Demand
What the salaried Indians want from Budget 2019 & what the Finance Ministry can offer?
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
With the Union Budget 2019 only days away, stakeholders of various entities are coming forward with their respective demands. Amid the dialogue around allotment of budget for various sectors, taxation is the leading agenda. The Interim budget as proposed by the Union Minister Piyush Goyal in February had introduced an array of changes for the salaried class.
In a big relief for the salaried Indians, the Narendra Modi-led government had increased the bar for taxable income to INR 5 lakh and also increased the standard deduction to INR 50,000 from INR 40,000, resulting in tax savings of INR 3,000 for individuals in the 30 per cent tax bracket. However, the advisory firm, Ernst & Young feels that there is still much scope for big hike on the standard deductions.
The findings of a recent report by the EY titled, "Run up to Budget '19: Why salaried Indians need a big hike in standard deduction' stated, "While businessmen and consultants can claim exemptions against all kinds of expenses every month, for salaried employees, tax is deducted at source by the employer, which significantly lowers the take-home pay."
The report argued that a consultant can claim 50 per cent of the gross receipts as expenses against the rent for office space, salaries & wages of employees, electricity expenses, stationery and such whereas salaried employees can't claim any purchase or spending they might have done for professional purpose for deduction from income.
Imagine a scenario when both the salaried employee and the consultant earn the same gross income (salary and gross fees) of INR 30 lakh. However, due to different approaches, salaried employee ends up paying INR 6.73 lakh in taxes whereas the consultant pays only INR 2.18 lakh, that's less than one third of the salaried employee's tax liability.
Based on the above outcome, the advisory firm has demanded a hike in standard deduction for salaried Indians. Responding to the claims, the Finance Ministry has issued a clarified as published by the Times of India on why salaried Indians don't need big hike in standard deduction.
Professionals Have More Expenses than Salaried Employees
The note as quoted by a media house states that "the taxable income in case of professionals is computed after allowing all the expenses incurred for carrying-out the profession. These expenses include rent for office space, salaries & wages of employees, electricity expenses for the office, printing & stationery etc."
In case of salaried individuals, the office and maintenance expenses are borne by the employer and the "only expenses required to be incurred by a salaried individual for earning salary income is the expense incurred for commuting to the office," for which the standard deduction is allowed to the salaried taxpayer which is currently INR 50,000.
Salaried Class Has More Ability to Pay Tax
The finance minister believes that the salaried individuals have more than double the ability to pay tax as compared to the professionals. Quoting the given example, the note made it apparent that the net disposable income after all expenditure and deductions for a salaried individual comes to INR 27,82,600 whereas it is only INR 13,25,000 in the case of professionals (after 50 per cent of the income has been taxed under the presumptive taxation scheme).
"Even after paying the tax, the net disposable income available to the salaried individual is INR 21,09,429 whereas in respect of a professional, this amount is only INR 11,06,600," the ministry pointed. One of the standards of taxation is to levy tax on the basis of ability to pay, and in the instant case salaried employees are more able to pay the taxes.
Professionals Need to Declare More Income in Case Less Expenses
The Income tax contains a presumptive regime for professionals having gross receipts up to INR 50 lakh, which allowed the professionals to not maintain books of accounts as it is presumed at 50 per cent of his gross receipts are expended towards various expenses required to be incurred for carrying out his profession.
The ministry ensured that this is not a standard deduction. "It has been provided in the Act that if the professional incurs expenses less than 50 per cent of the gross receipts, then he has to declare the higher income."
Comparing the two arguments, Entrepreneur India concludes that there is a difference between the two income-earning classes and their taxable incomes can't be compared. However, it is to be noted that an economy is only able to grow leaps and bounds when the citizens have enough spending power to better their standard of living.
China is a classic example of how disposable income increasing can positively impact a country. In the past few decades, we haven't witnessed any increase in several allowances that are offered for the salaried employees.
Providing some instances, Bhavin Turakhia, CEO, Zeta & Flock shared that the meal allowance is only INR 50 per day; while children education allowance has a limit of just INR 100 per month and the driver salary limit is only INR 900 per month. "It would be of great benefit for the salaried people employees if the Union Budget 2019 considers increasing the limit of such employee tax benefits," he expressed.
Each budget needs to introduce measures for long term economic benefits. Salaried class is the engine that drives the economy. The increase in income tax exemption limit will lead to more disposable income in consumers' hands as they will have more to spend on consumer goods.
"For a country like India where the middle class is heavily taxed with direct and indirect taxes, increase in exemption limit will ensure that the lower-to-mid middle class will be less burdened - while directly contributing to the economic growth of the country. Adjusted to inflation, growth," Ambud Sharma, Founder at Escaro Royale.
The nation is now adopting the startup culture like never before, hence creating ample of job opportunities. Youngsters fresh out of college without much experience are joining the innovative ventures on fewer salaries. The high tax slabs, however, end up forcing them to join corporates and MNCs to meet their requirements.
Considering that startups do not earn much in their initial business years, "we expect that the government can lower the income tax slabs for startup employees who will aid startups to reduce costs," requested Manas Mehrotra, Chairman, 315 Work Avenue.
The entire nation including the salaried employees are eyeing Nirmala Sitharaman's maiden budget on July 5. It would be interesting to see what the new Finance Minister has in store for her hopeful countrymen.