Friday, February 26, 2010

Unfair tax relief

Under the tax scheme proposed in the budget today, someone with a taxable income of Rs. 800,000 will enjoy a tax relief of nearly 35 percent -- he/she will pay Rs. 96.8 k as opposed to last year's 148.3 k.

For someone with an income of Rs. 500 k, the tax relief works out to 40 percent!

But, but ...

For people earning 160 k to 300 k, the tax relief is a nice round figure of zero percent.

In other words, a vast majority of tax payers (with incomes less than 300 k) will not see a single rupee of tax benefits, while their richer siblings will see pretty fabulous savings -- as much as Rs. 51,500 for those earning 800 k and more!

This would be a cruel thing to do even in a normal year. But this year is one that has seen pretty high inflation rates -- especially for food.

This is too bizarre for a government that claims to work for the Aam Aadhmi!

* * *

Data: See the table in this blog post for the data. The quantum of tax relief rises from zero percent (for incomes up to Rs. 300k) before maxing out at about 40 percent for 500k. From there on, it keeps falling steadily to, for example, about 35 percent at 800 k, and about 25 % at 1 million.


  1. Anonymous said...

    This time, I completely agree with you.

  2. shyam said...

    There is a popular forward on tax exemption to the rich..

    I am not quite sure if the theory is really valid, but if true this would be an opposing view point...

  3. Abi said...

    @Anon (#1): Thanks.

    But Which Anonymous are you? And on which issue did you disagree with me?

    Perhaps you should consider using a handle to 'identify' yourself.

    @Shyam: That's a pretty funny story. If only real life were really like in that story -- where everyone's share of the government's "services" is the same.

  4. Pratik Ray said...

    This is just completely stupid. Trust the Indian government to come up with something bizzare.

  5. Anonymous said...

    I fail to see what is so unfair about this. The tax rate is already low for the 160k to 300k band. For example, at income of 200k, the gross (not marginal) tax rate is a little above 2% and at 300k, the rate is below 5%. At 500k, the rate jumps to 11% and after this year's budget, this drops to 7%. And at 800k, the rate drops from the 18.5% of last year to about 12% this fiscal. Maybe you advocate the kind of cut at the low end that was given last year by increasing the zero tax bracket from 150k to 160k (at 200k, the tax drops from about 2.5% to 2%, a tax cut of 25%).

  6. Anonymous said...

    "...bizarre for a government that claims to work for the Aam Aadhmi!" --- Oh come one, nobody is that naive, or they deserve this government (and any other India has to offer).

  7. ggop said...

    Voodoo economics! These guys have taken their budget from the Republican playbook.

  8. Anonymous said...

    I guess science professors never understand economic.

    Still, I'll try some very simple explanation -

    Giving more tax benefit to lower income group will result in more food inflation.

    Giving more tax break to medium & higher income group results in increased demand for other goods/services which result in more jobs to the lower income group!

  9. Abi said...

    @Anon #8: I love the irony in your comment! I can't tell if you meant it, though -- the final exclamation mark is a bit ambiguous. ;-)

    But, yes, I am aware of efficiency-based arguments to justify screwing the less well off. Thanks for the reminder.

    @Anon (#5): I like to evaluate policy changes using this broad principle: the relative benefit to the less well off should be greater than (or, at least be the same as) that to the more well off. So, yes, a straight increase in the exemption limit to, say, 200k or even 250 k is far more preferable. But one could think of many other changes that would fit this principle.

    [For example, a straight decrease in tax rates from 10-20-30 percent to 9-18-27 percent would also be acceptable without a change in the tax slabs; a change to 9-19-29 would be preferable!]