You Have Been Paying Hidden Taxes For Years, But Finance Minister Won't Do Anything About It!

Successive finance ministers have shown themselves to be adept at increasing taxes without seeming to do so. This sleight of hand is on account of ignoring the impact inflation has on incomes and attendant taxes.

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If finance minister Arun Jaitley wants to discontinue this unfair tax policy he should begin tax indexing, or linking taxes to a pre-determined measure of inflation such as the consumer price index. His forthcoming budget should treat individual taxpayers fairly by a transparent mechanism of tax indexing.

Imagine that an individual¡¯s income keeps pace with consumer inflation. In other words, income doesn¡¯t really increase. It just offsets the erosion in the value of money brought about by inflation. Yet, in this scenario income tax paid out will keep growing as income has increased to keep pace with inflation. This is the hidden tax hike individuals have suffered for years.

Milton Friedman said: ¡°Inflation is taxation without legislation.¡± In India, perverse tax policy has compounded the damage wrought by inflation. This has to change. This paper yesterday carried a detailed working of what new thresholds of tax should be if the government were to adjust them for inflation.

It is a good entry point to the challenge of giving taxpayers a fair deal. But this should not be a one-time exercise. If small savings schemes can fix interest rates through a transparent method, the same logic can be extended to changing tax brackets. Taxpayers should not have to depend on the benevolence of the finance minister to get a respite from the fallout of inflation. A progressive tax policy would build in a mechanism to ring fence taxpayers from inflation. It is time India¡¯s overtaxed salaried individuals get a break.