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Why the Indian middle-class need to pay more tax

March 07, 2016 10:09 IST

When the state is unable to provide adequately for the bottom half of the population, should it be giving tax benefits to the well-off?

The focus of post-Budget discontent has been the proposal to tax a part provident fund when they are withdrawn. Everyone from Rahul Gandhi downwards has asked that the proposal be withdrawn - a universality which raises the question posed in this year’s Economic Survey, as to who is deserving of government largesse - and who is not.

The Survey said that Rs 1 lakh crore (about 0.7 per cent of GDP this year) goes to well-off or rich people as government hand-outs. But it also counted half the users of kerosene as “rich” - which would be stretching a point unless the argument is that large quantities of subsidised kerosene are used to adulterate motor fuels, which are used mostly by the rich.

The Survey reflected Prime Minister Modi’s comment at a business meeting in January, when he argued that the rich criticise subsidies to the poor, but ignore the subsidies that go to the well-off, because these are not called subsidies and are given other names. That is the nub of the issue.

What provident fund (PF) deposits benefit from is not called a subsidy; it is called tax-free treatment of that portion of income kept aside as savings. It is therefore a benefit that goes only to those who have taxable income, and have the money to put into PF accounts.

There are 37 million of them - or about 8 per cent of the working population. The non-salaried don’t have PF accounts; quite a few of them use a parallel savings window, the public provident fund account - but these typically involve smaller sums.

Meanwhile, government employees have what is called the New Pension System - where, unlike in the case of PF, the employer does not make a tax-free contribution. It would be safe to say that those with access to any of these are within the top quartile of the country’s working population (about 480 million), and further that the PF system is a more attractive one than the other comparable savings instruments.

Belonging to the top quartile indicates your position in a ranking according to income. But in a lower-middle income country like India, which also has large numbers of poor people, such a ranking cannot mean that everyone in the top quartile is automatically “well-off”.

Many people with PF accounts would be living simple lives on modest incomes, and the bulk of all salary earners would see themselves as belonging to the middle class, though they are in the top quartile.

A tax incentive for savings designed to keep them going in their senior years does not, therefore, seem something that is out of line - especially when the government does not provide any meaningful safety net, as many higher-income countries do. If the state does not help, and you have no family to fall back on, you have to live off your savings.

While all this is true, the question of who is deserving of state largesse cannot go away. The fact is that about a quarter of the population lives below the poverty line, and another quarter is technically above the poverty line but manages only subsistence-level living.

When the state is unable to provide adequately for the essential needs of the bottom half of the population (education, health care, social safety net), should it be giving tax benefits to those in the top quartile?

Especially when, as the Survey once again has pointed out, the income tax exemption limit has been going up faster than inflation. And when even those who travel in air-conditioned sleeper coaches are not paying for the full cost of their rail travel - while the poor sit on top of railway coaches to get to their destination.

At some stage, those who think of themselves as belonging to the middle-class have to reckon with the fact that in a country like India they are among the better-off, and need to pay their way.

Photograph: PTI

T N Ninan
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