Dr. Ravindran Pranatharthy, (Advocate) makes a strong case for abolition of personal income tax on salary incomes in order to significantly reduce the burden of tax invariably weighing heavily on salaried employees. The author suggests that income tax loss may, if needed, be made good by converting salary employment as a GST-liable service under reverse charge mechanism and input tax credit may be allowed to employers so that the salary incomes are protected. The author is of the view that, “The turn away from income taxation of salaried employment and resultant job-led growth will counterbalance the looming threat of loss of jobs under the rising avalanche of Artificial intelligence.”

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Biting the Cherry too much: Reforming the onerous taxation of  Employment

It is said not without a meaningful understanding of human psychology that every person, whatever his station in life, is defined  or prefers to be defined by his work.  There are not many who will be  lotus-gatherers to contemplate a life of abstaining from work altogether.  Good or not, all hands like to show up at some work, be they some bosses or rank and file.  Employment at work is the compelling lot of a vast majority of  us.  Puranas tell us that even the gods of heavens have to perform some required work no matter how divine they are. Indeed work seems an inescapable pull of cosmic dynamics.

Budget time is the salubrious season when ideas criss-cross the mind’s landscape and the policymakers in the Finance ministry may be looking out the window for a fresh rustle of the leaves and an inviting nip in the air. Let us hope the themes presented herein will reach the corridors of consideration.

Salary employment as the inevitable karmabhoomi:

The fact of millions of people being employed  under some entity has come handy for modern governments.  In particular, employees in the formal organized economy have served as the money spinner for income taxation of several kinds.   The field of salary employment is vast enough and only keeps growing. Please consider the following data available on AI enhanced  research.

As of March 2024, there were conservatively about 130 million salaried employees in India, which is about one in five of the country's labour force. This number is said to have doubled over the past two decades keeping up with the population surge and migration trends from basic tilling kind of agriculture.  Salaried employees are those who enter formalized work under some contract. There is no area of the economy immune to the enrolment of salaried workers  be they manufacturing, education, government itself, health care, banking,, insurance, marketing, sales etc. As is expected , more than half of all urban jobs are said to be under salaried employment. Increased thrust on digitization and formalization of the economy have tended to shrink the informal employment and expand the salaried employment.   Salary in this context denotes the wages paid for the work of the employees.  Salary in the formal economy is not limited to a basic wage and tends to include other allowances which vary over economy of such employment. Salaried employment involves long term commitment, generally long hours, sustained routines and little room for leaving other than taking vacations or becoming entrepreneurs.  Indeed, the long hours and wage uncertainty  which are the typical hallmarks of informal employment are said to have caught onto formal salaried employment. The unchanging  thrust of all human resource management anywhere has been about how to make the alchemy of salaried employees getting to love their jobs and so not deserting them easily. Salaried employment as the favorite milch cow of modern governments The ever-growing number of salaried employees under regular earning has not remained outside the quick grasp of the modern fiscal states. The British paved the way with a late  18th century tax on incomes that inter alia swept in salaried employment.  Employees lament that taxing their wages is akin to taxing hardwork. Indeed salary versus capital as a tax base in the tax debate has continued endlessly without reaching  a consensus among the policymaking elite. The fiscal States usually and readily like to point at the welfare state as their directive ideal which in their narrative requires ever needed resources to be mopped up inter alia from the salary of employees.

The burden of taxes weighing heavily on the salaried workers The list of taxes levied on the pockets of the salaried class is fairly well-known. The income tax is the foremost disliked state take-away. The high rates of income tax are certainly way higher in the excessive inflationary conditions  which are an endemic emblem  of the  much heralded 21st century. The continued levy of pinching personal income tax sapping the prospect of individual savings and the grossly inadequate and few exemptions  have resulted in strident calls for an outright abolition of the personal income tax except perhaps as a tax on really super rich incomes.

The local authorities are permitted by the Constitution to levy profession tax that also seeks to dip into the salary in the pockets of the workers. The rates of professional tax are risng too. The GST department has joined the tax bandwagon by making employment a taxable service but has exempted basic employment from the scope of the indirect tax by an exemption in schedule 3 of the Central Act. However disputes on the scope of joint employment, double employment, seconded employment and moonlighting have flared up. The noise notched up by the tax department over the notice-period pay is a telling reminder that the tax department might think of yet more novel ways to pinch the income in the pockets of the salaried class. That the employers would end up paying the GST will be of no consolation for the employees since the employers could target the salary  to compensate for the loss on account of such taxation.

Need for a new Tax Compact on salaried employment

The travails of salaried employees over the tax burden can no longer be ignored.  The fiscal State cannot now easily sell the old bromide of state welfarism as a debate-terminator. Economy needs sorely a big boost to consumption to obtain high 8% to 9% GDP growth year to year. The state largesse on Capex spending  is nearing  the limits of its utility and efficacy . A new paradigm in income taxation of the salaried class cannot be missed by the prudent fiscal state. Increased material consumption by individuals and households, it may be noted, is a money multiplier that will outgrow the tax loss and bring in additional revenues over the short and medium terms.

In this context, a starting point is the need to consider a wholesale abolition of personal income tax on salary incomes on any form of employment including moonlighting. The income tax loss may, if needed, be  made good by converting salary employment as a GST-liable service under reverse charge mechanism. Input tax credit may be allowed to employers so that the salary incomes are protected. The fiscal States may even use such  ITC provision so as to allow it at higher rates to industries that provide real and optimal employment in sectors and regions where the State likes to see sustained economic activity. If needed, the state may even deny the ITC to proved tax evaders. The possibilities are many and ideas are not in short supply.

The income tax department will be transformed with savings on manpower so that it will beneficially utilize it on combating tax evasion made through the generation of black money and benami acquisitions of properties and valuables.  Employees will additionally be relieved of filing the cumbersome tax returns. Indeed the income tax department should rely on tax deduction at source and tax abolition of employment income as a simplified tax management system. There will be no problems for the industry to revert to GST on employment as they are already familiar and compliant with the GST.

The income tax saved by the employees will largely be spent on family-needed goods and services which will boost manufacturing and services alike. The income tax retreat from salary income will facilitate a tide that will lift all the boats. Tax conversion into GST if contemplated should be carefully designed and calibrated  so as to launch the tide and sustain the momentum generated.

For long the tax policymakers have projected the Indian GST as a world-class model. More as an ardent wish than for real.  Here is an opportunity to demonstrate it to the world. Let India show a new way of looking at salaried employment that the world will have to sit up and take notice. The turn away from income taxation of salaried employment and resultant job-led growth will counterbalance the looming threat of loss of jobs under the rising avalanche of Artificial intelligence.