Another letter to the finance minister to revalidate the proposals in the earlier letter and with some more suggestions to make life easier for taxpayers

Dear Mr Chidambaram,
I don't know if it actually reached you, but I had sent you a letter last month with some suggestions and observations on personal income tax. You must be a very busy person these days, so I know it is too much to expect an acknowledgement. I do hope my effort was not a waste and you have included my suggestions in the budget.
In case you don't remember the letter, you can click here to read it

I am writing to you again, in case you are still not convinced of my arguments in the earlier letter. As you already know, I am only interested in bringing down my tax burden and I shall limit my efforts to convince you that why it is such a burden.

Sir, I am a salaried individual – male and not yet a senior citizen. I don't speculate in the stock or commodity markets, but I regularly make long-term investments in mutual funds. I contribute to my provident fund account like everyone else and also have an insurance policy, which has a sizeable savings element to it. I have never won a lottery or a bet at the racecourse, though I would love to. I don't own any farmland or any property that can be rented out. In other words, I don't have any other sources of income apart from my salary.

My gross salary, including all variable pay, is a not so substantial Rs7 lakh per year. Based on the tax rates imposed by you, my employer – your collection agent – withholds close to Rs90,000 as TDS from my annual salary. That is after considering the basic exemption limit, my eligible savings under Sec 80 C, a modest benefit on the HRA part of my salary and the few 'fringe benefits' my employer has not yet withdrawn because of your 'fringe benefit tax'.

So, the income tax I pay as a percentage of my gross income is slightly less than 13 per ent. Your communist friends will definitely argue that it is extremely low and would want you to tax the 'petit bourgeois' like me even more. It is another matter that many of the communist members of parliament earn much more than I do, if free housing and other allowances are included, but still pay less tax than I do. Politicians of other parties are in an entirely different league altogether, and I don't want to go into their income details now.

But, the 13 per cent tax incidence on me is only an illusion because you forcibly take your cut every time I consume some product or service. Now that you have expanded the list of services in the service tax net, there is nothing in my world, except the air I breathe, that is not taxed. You take all the credit for the incredible growth in your tax revenues and the improvement in fiscal conditions, even though all you have done is identify more ways to tax regular folks like me. You never bothered to control your spending and in fact found more avenues like the rural job guarantee programme to waste even more money. I am not going into more details, we can argue about that later.

The other day I made some calculations, based on my habits as a consumer, to find out how much money you appropriate from me as indirect taxes. I drive a small car and am forced to drive 30km a day on an average, because I can't afford the rent for an apartment closer to my workplace, and spend around Rs3,000 on petrol every month. I am not all that talkative, but my wife obviously is and our total monthly telephone and communication expenses - including broadband internet at home for my wife to chat online with her friends - are around Rs3,500. My small family consumes around Rs7,000 worth of food, personal products, entertainment and the like every month. This will only increase as our little girl starts school next year.

Based on the current rates of excise duty, VAT and service tax on the above mentioned goods and services, I reckon that you collect close to Rs50,000 every year as indirect taxes from me. Yes, some of these taxes go directly to the state governments and you have no role to play. But, to keep it simple, I am assuming that everything comes to you. You collect most of these indirect taxes anyway.

If I add the Rs50,000 in indirect taxes to my annual income tax of Rs90,000, the total goes up to Rs1.4 lakh which is 20 per cent of my gross income. It will go up further if I add tax on capital gains, which - based on the EET principle - you are now threatening to extend to all kind of investments.

Being a great lawyer, I am sure you will find enough arguments (lawyers can be so argumentative… after they get paid for it) to establish why you are right in appropriating 20 per cent of my income as various taxes. But, with all due respects, I would still disagree with you and continue to believe that you are overcharging me for the services your government provides. As mentioned in my last letter, I don't think many will disagree with me when I say regular salaried folks like me bear a disproportionately high tax burden. Only because my income is fully accounted for and it is very easy for you to tax me!

Therefore, I again urge you to hike the basic exemption limit to Rs3 lakh per annum as suggested in my earlier letter. My argument behind this suggestion remains the same – it will ease the workload of your tax collectors by bringing down the number of tax returns to be processed. They can go after the big tax evaders and collect even more taxes, which should make you and your communist friends happy. This proposal may free sufficient tax collectors for you to even consider setting up a KPO business to process tax returns for the Americans and Europeans.

I would also like to add a couple of suggestions, which I feel you should consider. The first suggestion is to increase the Sec 80 C limit to Rs2 lakh per year from the current Rs1 lakh, which many like me think is too low. You may withdraw the separate deduction of up to Rs1.5 lakh currently available for interest on home loans, and include it under the overall Sec 80 C limit. This will remove the bias towards housing and give the taxpayers more flexibility in their long-term investments. I am not sure if you will agree, but I feel there is no need for the government to micro-manage everything.

The second suggestion is to make your indirect tax rates more dynamic. I am sure you have heard about dynamic pricing for airline tickets, whereby prices move up or down in direct proportion to changes in demand. There are rumours that your good friend Lalu Prasad is planning to make railway ticket pricing dynamic. Being a very progressive person credited with many innovative ideas to increase the tax base, it will be a blot on your record if you don't move with the trend.

Currently, your indirect tax rates remain fixed irrespective of the total amount collected by you. The more people like me consume, the more taxes you collect. I know this arrangement is very convenient for you and is the main reason behind the recent surge in your income levels. It also allows you to invent new schemes to spend more money.

But, this is highly unfair to tax payers as we sometimes end up paying more than you budget for – just because we are now consuming more. I understand that it is not quite advisable to have dynamic tax rates, which move up when your collections are low and are reduced when the government's financial position is comfortable. Businesses and consumers will find it difficult if you increase your tax rates when your revenues decline during an economic slowdown.

My suggestion is different. From now on, you should fix a limit for the total amount you need during a year from indirect taxes. Once you have achieved your targets for each segment of indirect taxes, you should stop collecting such taxes for the rest of the financial year. This will benefit those with low-income levels more, including those who pay no income taxes, as indirect taxes are not progressive.

We can extend this system to direct taxes later, as there will be huge political opposition if we introduce this at one go. Once fully implemented, this will be a very effective way to ensure fiscal responsibility while at the same time pleasing the taxpayers no end!

If you wish to discuss any part of these proposals, I am more than willing to do so.

Yours truly,

Vivek Sharma

PS: I had promised to send you a Tamil couplet to be included in your budget speech. But, I later realised that I know no Tamil! How stupid of me! Anyway, I managed a couple of lines in English – which you may of course translate to Tamil if you wish.

This glorious motherland of ours was built with taxpayers' money
And it is the taxpayer the finance minister shall please