Poverty redefined

As a nation, we have spent a lot of time studying poverty. But there is no study that concentrates on prosperity or richness.

According to poverty estimates by the Planning Commission, the national poverty line was drawn at ₹816 per capita consumption expenditure per month (₹27.2 a day) in rural areas and ₹1,000 (₹33.33 per day) in urban areas. This was widely criticised as being too low, so, one more panel, under C Rangarajan, is re-working on it.

Ability to pay

Is there a line to demarcate richness? Yes — the Basic Exemption Limit (BEL) of income tax. It is fixed on the principle of ability to pay. BEL can be termed as the line of ability to pay (LAP). Only beyond that level of income are people considered to be able to pay income tax. The progressive tax regime followed in many counties is based on the principle of ability to pay. This principle justifies the basic exemption given from the liability of income tax.

According to Pulin Nayak and Pawan K Aggarwal (‘Exemption limit and personal income tax: An international comparison,

Economic and Political Weekly , July 8, 1989), “Two broad justifications may be provided to have income up to a certain level exempted from tax: (1) The capacity to pay income taxes may be regarded as being low for very low incomes. Individuals with low incomes up to a certain level may thus be exempted from paying tax. This may be thought of as being an equity argument, (2) On grounds of administrative cost, it might be advantageous to exempt a large number of taxpayers with very low tax liability if it is felt that the ratio of cost of collection to the tax yield for such persons would be so high as to make the imposition of the tax uneconomical. This may be thought of as being an administrative argument.”

In India, the current BEL is ₹2,00,000 per year for individuals and Hindu Undivided Family. For an individual, the exempted income per day works out to ₹548. So, at ₹548 a day of income, a person is comfortable to pay off his fellow countrymen. This is the LAP. Can we consider this level of income as one sufficient to fulfil his basic needs comfortably? Why cannot this amount be adopted as the line of prosperity (LOP)?

Here, it should be noted that BEL is fixed, irrespective of the family size, at ₹2,00,000. So it is necessary to adjust the exemption limit for the family size. In India, all families do not have persons who pay income tax, whereas some families may have one or more tax payers.

At the worst, a tax-paying family must have one tax payer. At an average family size of five persons, the average exempted income per person works out to ₹40,000 a year. It averages to ₹110 a day.

After adjusting for family size, the BEL comes to ₹110 per day per person. Let us call this family size-adjusted BEL (FABEL) and family size-adjusted LOP (FALOP). The difference between FABEL and Poverty Line is ₹76.67 per head per day. The gap between the recognition of the poor and rich is very wide.

Bring in the family

Does it mean all the people below FABEL or FALOP should be treated as poor? No; the BEL was fixed not only based on the ability to pay principle but also based on the administrative principle. The administrative principle has economy of collection also in mind. So the BEL is fixed at a level higher than the Ability to Pay Line.

Hence, it needs to be corrected to arrive at a correct Ability to Pay Line. The Poverty Line should be fixed after adjusting it for family size. Based on it, the effort should be to ensure every one below this line is assisted to come out of poverty.

The writer is an Indian Revenue Service officer. The views are personal