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Why government gives rebates and doesn't enhance exemption limit

PRECISE AIM: Rebates spur consumption but increasing exemption limit may dent collections from higher tax brackets

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The government enhanced the rebate available under Section 87A from Rs 3500 to Rs 12,500 in the Interim Budget, making taxable income up to Rs 5 lakh tax-free in the hands of small taxpayers without raising the exemption limit. A few of my friends have been asking me why the successive governments do not raise the exemption limit instead of playing with rebate under Section 87A. I feel the government has very strong reasons in not enhancing the exemption limits, and therefore, has to play with the rebate provisions. Some of my thoughts on this are as under:

A broader base

The number of people who file their income tax returns (ITR) as a proportion of the population is very minuscule, which is evident from the fact that just 6.85 crore ITRs were filed against the population of around 120 crore. 

It is still shocking to learn that out of these 6.85 crore people who filed their ITR, around two crore did not pay any tax. These people had to file the ITR for various reasons such as gross income exceeding the threshold exemption limit but no tax liability due to various deductions available, or for claiming a refund for the tax deducted at the source even though the taxable income was below the exemption limit. 

Successive governments have been making attempts to broaden the taxpayers' base. One such measure, popularly known as “One by Six scheme”, was introduced long back but was withdrawn due to its ineffectiveness. This scheme required you to file your ITR if you satisfied any six conditions like having a credit card or owning a residential house or a motor car or electricity bill running over a certain amount or having undertaken foreign travel, etc. If the exemption limit is doubled from Rs 2.50 lakh to Rs 5 lakh, a lot of people would no longer be required to file ITR and just go out of the tax network.

Data for decision making

The government has to gather data on the economy and other related subjects to take many major policy decisions. The government wants data, and that too, early. The government has been persuading the taxpayers to file their income tax returns earlier than what was permissible earlier. This is evident from the time window available for filing the ITR. 

Earlier, one could file ITR for two years, which has been reduced to one year. Moreover, now the government has introduced a provision for levy of mandatory fee in case you file your ITR beyond the due date. These steps provide the evidence as to how much importance the government is giving to data and its timely collection. In case the exemption limit is raised, a lot of taxpayers will go out of the tax network, thus making data unavailable to the government. Even if your tax liability is nil due to your taxable income being just below the magic figure of Rs 5 lakh, you still are required to file the ITR which will enable the government to have access to data. 

Ensuring savings for small taxpayers without losing much of tax revenue: 

Consumption is the key to the growth of any economy. So the government wants people to spend more, and at the same time, ensure that it does not lose much of the taxes. The rebate under Section 87A ensures that only the small taxpayer is able to save tax while persons earning above the threshold limit pay regular taxes. The government knows that money saved by lower-middle-class taxpayer is spent whereas the money saved by higher bracketed taxpayers generally gets saved. 

As every government needs to raise its revenue and as the impact is higher in monetary terms, it cannot afford to lose the money which it collects from taxpayers in higher tax brackets. If the exemption limit is raised, the successive slabs are also raised correspondingly. The government loses Rs 75,000 for tax bracket of 30% whereas the loss of revenue for the small taxpayer is only a maximum of Rs 12,500 (at the rate of 5% tax). Moreover, the people in 30% tax bracket have more ability to bear the tax than the people in the lower bracket.

Curb on unaccounted money

Just by ensuring that more and more people file their ITR, the government will be in a position to have records of earnings and assets of such persons. If the exemption limit is raised to Rs 5 lakh, which is not a small amount, many ITR filers will go out of the watch of the government. Since tax department cannot question you beyond a certain number of years to detect cases of tax evasions, these people can always claim that the capital and assets were built up over the years when their income was below the exemption limit. It may make generation and usage of black money rampant. 

A WIDE NET

  • Of the 6.85 crore people who filed their ITR, around two crore did not pay any tax
     
  • With more people filing ITR, the government will have records of earnings and assets of such persons

The writer is tax and investment expert

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