Small Scale Professionals Have Presumptive Tax Cushion, But What About The Salaried Class? 

Small Scale Professionals Have Presumptive Tax Cushion, But What About The Salaried Class? A representative image of Indian income tax return form with calculator and a pen. (Rajkumar/Mint via Getty Images)
  • Why there is a case for a separate schedule of progressive rates of taxation on salary.

To say that the salaried class has always been a sitting duck for successive finance ministers is trite.  But not many know that the income tax law has a soft corner for small scale professionals — with gross annual revenue not exceeding Rs 50 lakhs.  Under the presumptive taxation scheme in vogue for them, they are deemed to have earned just 50 per cent of their gross revenue. In other words, they are deemed to have incurred a business expenditure of 50 per cent of their gross revenue.

To wit, let us say there is a practicing lawyer making Rs 50 lakhs a year.  He can get away with a tax on Rs 25 lakhs after claiming various deductions under sections 80C, 80D etc.  Contrast him with his counterpart sweating it out as legal adviser in a company, drawing a salary. No relief for him beyond a token standard deduction of Rs 50,000.  Of course his house rent allowance would be insulated from income tax to some extent but the salaried class has always been chafing at this huge discrimination vis-a-vis professionals.  Now this discrimination has got heightened and come into bold relief after the ushering in of the presumptive taxation scheme for small scale professionals.

The existing inequity to the salaried class vis-a-vis small scale professionals can be highlighted as under:

  • A salaried person has to pay tax on his entire salary whereas a small scale professional may pay only on 50 per cent of his professional fees under the presumptive tax scheme.

This inequity can be corrected by the following steps.

Let there be a separate schedule of progressive rates of taxation on salary. There is no reason why the salary portion of one’s total income should not be taxed at special slab rates —5 per cent up to Rs 5 lakh, 10 per cent on salary between Rs 5 and Rs 10 lakh, 15 per cent on salary between Rs 10 lakh and Rs 15 lakh and so forth.

There are parallels.  Long term capital gains are taxed at a special flat rate of 20 per cent just as windfalls like lottery are taxed at the maximum marginal rate of 30 per cent. To be sure these aren’t exactly parallels because they are flat rates but the point is when one set of taxpayers can be pampered with special concessional flat rates, there is no reason why the salaried class cannot be treated fairly with special concessional progressive rates.

The resultant loss of revenue to the exchequer can be easily made good through fuller and more targeted use of direct taxes like taxing dividend income fully in the hands of the shareholders, taxing share market gains more fully as against the extant slap on the wrist of 10 per cent tax on long term capital gains beyond Rs 1 lakh and reviving wealth tax and estate duty.  In any case it can hardly be anybody’s case that the salaried class should be the favorite whipping boys of the exchequer. Not only should direct taxes be made use more fully and widely but also the small traders getting away with a concessional GST on turnover upto Rs 50 lakh should be simultaneously made to cough up the presumptive income tax under the prevailing scheme.

Notwithstanding Piyush Goyal’s Interim Budget for 2019-20, the salaried taxpayer has a few issues of concern. Taxing of medical benefits extended by the employer to employees and their families by the Finance Act, 2018 is one such.  A generous exemption regime with due safeguards was obtained till then. It must be brought back.

The Narendra Modi government 2.0 should keep its promise of rewarding honest taxpayers (read the salaried class). Sometimes, parity and fairness is a reward in itself.


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