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Zero income tax for women
August, 13th 2018

The prime minister has asked for innovative, out-of-the-box ideas for his Independence Day speech. So here is one. It sounds wacky, but it might work. Make salary income of all working women completely tax free. Here are the reasons.

Firstly, there is a very serious issue of the decline in the number of women in India’s labour force. It has fallen by more than 10 per cent since 2004. Only about 28 per cent of women are in a paid job. For men, this is 88 per cent. For women, the number used to be 38 per cent about a decade ago. In developed countries, the figure is usually over 70 per cent. In Sweden it is 88 per cent. By contrast, in urban India, only one in five women is employed.

India’s female labour force participation rate is among the lowest in the world. If more women work and are paid, it increases their purchasing power, leads to more consumption expenditure, more demand for goods and services, more business, more jobs, and more working women. It is a virtuous cycle. It also empowers women by making them financially independent.

But for those who work, there is a huge gender pay gap. On average, women are paid only 62 per cent of what is paid to men in the same job. If more women are in the workforce and are paid roughly equal to men, then India’s GDP can rise by almost 27 per cent as per an IMF estimate. Imagine the consequence. So making salaries of women tax free, and also freeing their employers from deducting taxes for female staffers (the dreaded Tax Deducted at Source, or TDS), will serve as a huge incentive to hire more women.

The second reason is that the number of income tax payers is anyway a small fraction of the population, less than 3 per cent. Of these, women form an even smaller fraction. And of that, the share of salaried women is very small. Hence making their salary income tax exempt isn’t too much of a burden on the exchequer. The loss of income tax to government will in fact be compensated by the fact that extra women in the workforce will spend on things and services, increasing the GST (and hence tax) collection.

The third reason is that every working woman is likely to hire a domestic help or a cook. Young mothers who work are also likely to put their kid in daycare. On average, for every one working woman at least 1.5 other jobs are created. This multiplier is more for women than men. The folks at a think tank called Takshashila had worked this out and were the first to suggest this radical idea of income tax exemption for women.

The fourth reason is that this idea is relatively easy to implement. You can’t misrepresent yourself as a woman. Hence it is unlikely that there will be fraudulent tax evasion. The proposed exemption is agnostic about which industry the woman may be employed in, or whether she is from lower or upper income class. So no discretion of tax authorities is needed. We are not advocating complete income tax exemption. Only the part of income that is earned as salary or wages. That is earned income, not passive income from mutual funds, fixed deposits, dividends, gifts or inheritance. If the PM feels bold enough, we can make complete income of women as tax free (but that would be going too far).

Think of the impact of this tax exemption policy. Employers will have lower TDS and professional tax burden. They can also hire more women, pay them less so that on post-tax basis they are on par with their male counterparts. This certainly creates more employment opportunities for women.

The zero tax policy can be coupled with other incentives as well, such as rewarding companies who hire women or making certain jobs reserved exclusively for women. Some examples are garment industry workers (in Bangladesh more than 90 per cent garment workers are women), or in toll and ticket collection all over India, certain sections of hospitality and the retail sector. Most importantly the proportion of women in law enforcement, police and security jobs (including military and paramilitary) should be increased substantially.

Many women are unable to return to work after becoming a parent, due to lack of good quality affordable day care for their child. This can be a priority focus for public policy. Many women also tend to be caregivers to the elderly in joint families, which is another factor that keeps them from taking up a job. And then there are socio-cultural factors especially in upper income families, which prevent women from working. So we have a long way to go. But giving salary income total tax exemption is an idea worth trying. Happy Independence (from tax) Day!

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