Has the tax exemption kept pace with inflation?
When it comes to inflation, it is natural to apply it to prices of goods & services. Avid investors would be concerned as to whether their returns from investment(s) beat inflation. But the most forgotten yet important issue is whether tax exemptions and tax slabs have kept pace with inflation. In other words have the tax slabs been inflation indexed? Let us examine where inflation has taken taxes to!
Nominal vs Real money value
Prior to delving into the subject lets get 2 terms clear. A nominal value is the face value of money - a nominal value of Rs.100 in 2005 is Rs.100 and in 2014 is Rs.100 as well. However real value of money is one that is adjusted for inflation (based on cost inflation index). So, Rs.100 in 2005 is not Rs.100 in 2014, but its real value has dropped to Rs.48.53 in 2014 due to inflation. In other words, if you had paid Rs.100 for a good in 2005, you would have to pay nearly twice that amount, Rs.195 for the same good in 2014 (based on cost inflation index).
The tax exemption (80c) case
With the introduction of 80c in the Finance Act 2005, an overall deduction of Rs.1Lac was granted for eligible investments made under EPF, LIC, PPF, NSC, principal of home loan EMI etc. In 2005, the cost inflation index was 497, in 2014 it is 1024. The Rs.1Lac of 2005 is worth Rs.48535 today. This means to allow a deduction of Rs.1Lac in real value terms, at least an additional Rs.51465 ought be allowed in 2014, which requires bringing up the total eligible deductions u/s 80c to Rs.1,51,465. In fact this gap has been widening every year from 2005 to 2014 and has not been re-adjusted to keep pace with rising inflation.
The tax slabs case
The basic exemption limit was at Rs.15000 in 1982-83. It has been incrementally revised since then to Rs.200000 in 2013. Although the numbers look (deceptively) justified, when we apply cost inflation index to the Rs.2Lac basic exemption limit in our tax slab today with respect to 1982 it works out to a mere Rs.22656. This means in real value (inflation adjusted over 30 years), we're offered only Rs.22k as basic exemption. To bring up the basic exemption to Rs.2Lacs in real value terms, another Rs.1,77,344 ought to be allowed in 2014, which requires bringing up the basic tax exemption to Rs.3.77Lacs.
Tax burden
As you may notice, since the tax exemptions and tax slabs are not inflation adjusted, we end up paying much more tax now than in 1982 in real money terms (remember the rising inequality issues world-over?). This lop-sided tax system not only burdens tax payers with more tax but also erodes the opportunity to save for one's genuine long term needs such as children's education, retirement and medical expenses. Interestingly, in April 2014, the finance ministry has rejected a proposal to link tax exemptions and tax slabs to inflation. It remains to be seen whether the new government would take up this subject in its july budget.
Nominal vs Real money value
Prior to delving into the subject lets get 2 terms clear. A nominal value is the face value of money - a nominal value of Rs.100 in 2005 is Rs.100 and in 2014 is Rs.100 as well. However real value of money is one that is adjusted for inflation (based on cost inflation index). So, Rs.100 in 2005 is not Rs.100 in 2014, but its real value has dropped to Rs.48.53 in 2014 due to inflation. In other words, if you had paid Rs.100 for a good in 2005, you would have to pay nearly twice that amount, Rs.195 for the same good in 2014 (based on cost inflation index).
The tax exemption (80c) case
With the introduction of 80c in the Finance Act 2005, an overall deduction of Rs.1Lac was granted for eligible investments made under EPF, LIC, PPF, NSC, principal of home loan EMI etc. In 2005, the cost inflation index was 497, in 2014 it is 1024. The Rs.1Lac of 2005 is worth Rs.48535 today. This means to allow a deduction of Rs.1Lac in real value terms, at least an additional Rs.51465 ought be allowed in 2014, which requires bringing up the total eligible deductions u/s 80c to Rs.1,51,465. In fact this gap has been widening every year from 2005 to 2014 and has not been re-adjusted to keep pace with rising inflation.
The tax slabs case
The basic exemption limit was at Rs.15000 in 1982-83. It has been incrementally revised since then to Rs.200000 in 2013. Although the numbers look (deceptively) justified, when we apply cost inflation index to the Rs.2Lac basic exemption limit in our tax slab today with respect to 1982 it works out to a mere Rs.22656. This means in real value (inflation adjusted over 30 years), we're offered only Rs.22k as basic exemption. To bring up the basic exemption to Rs.2Lacs in real value terms, another Rs.1,77,344 ought to be allowed in 2014, which requires bringing up the basic tax exemption to Rs.3.77Lacs.
Tax burden
As you may notice, since the tax exemptions and tax slabs are not inflation adjusted, we end up paying much more tax now than in 1982 in real money terms (remember the rising inequality issues world-over?). This lop-sided tax system not only burdens tax payers with more tax but also erodes the opportunity to save for one's genuine long term needs such as children's education, retirement and medical expenses. Interestingly, in April 2014, the finance ministry has rejected a proposal to link tax exemptions and tax slabs to inflation. It remains to be seen whether the new government would take up this subject in its july budget.
Comments
Post a Comment