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On taxation of salaried employees in India
February, 16th 2007

Although equity is one of the main canons of a tax law, inequity in taxation laws can be accepted to a certain extent given the fact that the nature of professions and income earned are different. For long, salaried employees in India have been complaining that tax laws are against their favour.

Nothing can probably signify this more that the fact that a salaried software engineer in Bangalore, having a gross salary of Rs 20 lakh, pays a tax of around Rs 7 lakh while one of the ubiquitous small restaurants in Bangalore- darshinis in local lingo- with a similar turnover reflects a net taxable income of around Rs 70,000 and pays a pittance as tax on that.

Blame this on the rigorous tax deducted at source norms or relaxed norms for small hotels, the difference still glares.

Deductions

The ideal taxation system for salaried class was probably a few years back. Their income was subject to the threshold limit exemption, they were entitled to a housing loan interest deduction of Rs 1.5 lakh and their tax break for saving was Rs 1 lakh.

However, there has been no increase in these limits even though inflation has bitten into the wallet of the salaried man a bit deeper and the increase in his salary has been met with an increase in his tax with no corresponding increase in his savings options.

To add to his woe, the service tax on services he utilises is 4.24 per cent costlier and he has no facility of setting off the tax he has paid against the services he renders. Contrast this with other professionals who can set-off their service tax on input services.

Service tax

The increase in service tax on all services and the cost-push effect of inflation has ensured that the salaried man is worse off.

Two deductions reflect the concern of the salaried tax payer. He has been entitled to a measly deduction of Rs 800 a month as conveyance from the home to office and back. With cities expanding, companies prefer to set up their offices in areas that are invariably a wee bit away from the city. This deduction would not cover his actual payout even for about 10 days transport costs. The employee would not prefer to shift his residence to these places since the conglomeration of IT companies ensures that costs are much higher.

Medical expenses

Similarly, for medical expenses incurred, the cap has been fixed at Rs 15,000 a year. This deduction also needs to be increased substantially since hospitals demand more than this amount even to get admitted in there. Many companies do cover their employees with mediclaim schemes but the purpose of this deduction has been to cover expenses that employees incur on their own.

Similarly, preventing employees earning income above a particular limit from claiming the benefit of standard deduction seems inequitable. With the levy of fringe benefit tax, companies think twice before providing any perquisites to employees since this tax comes as a dampener. This results in making back-of-the-envelope calculations as to whether taking the money as salary and paying tax is better or recording a perquisite and the company paying fringe benefit tax on it is better.

Perquisites

There are also a number of perquisites in the Indian tax law for salaried employees such as salaries to gardeners and provision of gas facility in the house that need to be re-looked. The deductions here too are too measly to merit attention and employees who get these perquisites are at a position in the company wherein they would not mind paying this on their own. This could be a good time for the Finance Minister to redress some of the grievances of the salaried class.

Otherwise, the growing trend of classifying salaried employees as "consultants" and classifying the salary paid as income from profession can only increase.

Mohan R. Lavi
The author is General Manager - Finance, JDA Software India Pvt Ltd.

 
 
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