1. The new incumbents of the Central Government
having taken oath of office on 26th May, 2014, seem to be busy with
budget making in full swing. The Finance Ministry must be getting
flooded with submissions and representations from various quarters,
including various Chambers of Business, Trade and Commerce, giving their
views and suggestions in regard to measures that the Finance Minister
(FM) should incorporate in the Finance Bill, 2014 concerning Direct and
Indirect Taxes. In such representations the concerns of business, trade
and commerce are widely represented and substantial reliefs are sought
for. It is regrettable to note that the FMs in the past preferred to
have pre-budget meetings with the Industrialists, Economists,
Agriculturists (who are not even income-tax payers), Trade Union
leaders, etc., but not with humble individual taxpayers, who toil and
perspire to earn their incomes or their associations to know what are
the problems they face concerning Income and Wealth-tax Acts, what they
feel about the tax laws through which they are taxed and contribute
substantial revenue to the Central Govt. year-after-year. It is sad to
find that such taxpayers have been ignored during the pre-budget
meetings even by the new Govt. at the Centre.
Non-corporate assessees like individuals, firms and
their partners, association of persons through their members contribute
substantial revenue to the Govt. by way of taxes. Their problems vis-à-vis
corporate houses are of a minor nature. Yet their legitimate needs are
neglected. Not only that, individual taxpayers, deriving income from
personal employment, deserve better treatment because their incomes are
earned by their personal toil, not passively through investments,
royalties, etc. Sadly, such taxpayers since the F.Y. 2005 are denied
deduction even for employment related expenses and presently are
virtually being taxed on their gross salaries.
2. RELIEFS THAT ARE NECESSARY IN THE CONTEXT OF PERSONAL TAXATION
2.1 Deduction for expenses: Some years
back, salary income was considered as 'earned income' along-with
professional and business incomes as distinguished from rent, interest,
dividend income, etc., and was taxed at concessional rates of
tax. The benefit of income being taxed at concessional rate, treating
the same as earned income, was discontinued. There could be no objection
from any section of taxpayers on the ground of their being differently
treated. But, discrimination vis-à-vis other taxpayers was
definitely practiced when Shri P. Chidambaram, the Ex. FM, decided to
withdraw the 'Standard Deduction' (SD) in lieu of employment related
expenses admissible to salaried taxpayers.
2.1.1 Why SD was permitted to salaried employees?
SD used to be allowed to such taxpayers in lieu of
expenditure [allowed under section 16 of the I.T. Act, 1961 (Act
hereinafter)] incurred for earning salary income and, hence, deductible
for working out taxable salary income. Section 16 of the Act, dealing
with deductions from salaries, underwent a vital change from 1-4-1975 by
the Finance Act, 1974, when clause (i) was substituted by a new clause and clauses (iii), (iv) and (v) were omitted. These later clauses (iii) to (v) dealt with deduction from salary income of: (i) professional or other taxes; (ii) expenses for conveyance used for the purpose of employment; and (iii)
expenses incurred wholly, necessarily and exclusively in the
performance of duties, excluding expenses on purchase of books or
publications or on entertainment or conveyance, which were covered by
clauses (i) to (iv) of section 16. Thus, in cases of
salaried employees expenses for earning salary were allowed in the same
way as expenses for earning business income on the philosophy that
expenses incurred wholly and exclusively for the purpose of earning
income were allowable deductions and this was fully engrained in the
concept of SD, which term was used to represent such expenses limited to
the extent provided in the relevant provision. Notes on clauses of the
Finance Bill, 1974, show that change in section 16 providing for SD from
salaries was made to replace the existing provision in section 16
relating to separate deductions in respect of expenditure on travelling,
books, performance of duty, etc., for rationalization and to introduce
simplification by a consolidated deduction termed as SD. The amount of
deduction has been changing from time-to-time to counter impact of
inflation but the nature remains the same, namely, that it is to
compensate for expenses required to be incurred, which are incidental to
employment in the computation of salary income.
The scheme of the Act is clearly indicative of the
position that the income liable to tax is not the gross income but the
income remaining after deducting the expenses incurred in earning the
same as permitted under the Act. Where there is no specific statutory
provision for a deduction in the computation of taxable income, it does
not mean that there would be no deduction. The question is to be
resolved on the basis of commercial accounting principles and practices,
provided they do not go against the grain of the Income-tax statute.
This principle has been accepted for all sources of income, whether
these relate to salaries, income from house properties, business or
profession, capital gains or income from other sources in various
sections of the Act. If expenditure relating to earning of income is
deductible in cases of other sources of incomes, there is no rationale
for not allowing deduction for expenses incurred for earning salary
income, which were allowed item-wise till 31-3-1975. For simplicity
sake, the concept of giving lump sum deduction as SD was introduced.
Such deduction for the sake of simplicity is allowed in computation of
income from house property also, where too expenses are deducted not on
item-to-item basis but by way of SD for repairs, renewals, etc., under
section 24(a) @30% of annul value.
2.1.2 SD withdrawn by Shri Chidambaram on wrong premises
The reasons given by the ex-FM for removing SD, it
needs to be said with utmost respect, are misleading and wrong. Shri
Chidambaram in the budget speech said:–
"Given the higher exemption limit and scaling up of tax
brackets, the need for a separate personal allowance does not exist.
Therefore, in conformity with growing international practice, I propose
to remove the Standard Deduction".
These grounds are superficial and do not justify
withdrawal of SD, as SD is not for personal expenditure and was being
given in lieu of employment-related expenses. Further, the exemption
limit was raised not only for salaried employees but also for all
individual taxpayers.
The ground given that SD is a personal expenditure is
obviously ridiculous. It is in lieu of employment-related expenses on
books, computers, websites, e-mails, employment-related journals and on
various other expenses. If such expenditure in full can be claimed by
businessmen and professionals in computation of their total incomes for
tax purposes, there is absolutely no ground to deny even token deduction
of expenses in the form of SD for salaried employees.
The last ground that removal of SD is in conformity
with growing international practice is also wrong. The Shome Panel's
report shows that in many countries like Malaysia, Indonesia, Germany,
UK, Japan, France & Thailand, SD in some form or the other is being
allowed to salary earners for employment related expenses.
The foregoing discussion shows that SD was not
conceived as donation, charity or personal allowance for salaried
persons but was in lieu of expenses that were required to be spent for
earning salary income.
From the foregoing discussion it is clear that the
SD was discontinued by the Finance Act, 2005 for untenable reasons and
the injustice done was perpetuated by ex-FM during the period he
continued to be the FM. It is hoped that the new FM will realize the
injustice meted out to the salaried taxpayers and restore the SD at a
suitable percentage, keeping in view the ongoing inflation.
3. OTHER ASPECTS THAT NEED CONSIDERATION CONCERNING PERSONAL TAXATION
3.1 Review of monetary limits fixed long back: No reviews concerning these have been made in the past 10-12 years. Some suggestions regarding these are as follows:-
3.1.1 Change of monetary limit regarding exempt conveyance allowance
Presently, the conveyance allowance granted by the
employer to the employee to meet the expenditure for the purpose of
commuting between the place of residence and the place of his duty is
tax exempt up to INR 800 per month in terms of section 10(14) of
the Act, read with rule 2BB of the Rules. This exemption limit was fixed
in 1998 and has become nominal considering the ever rising fuel costs
and resultant conveyance costs. Hence, it needs to be suitably enhanced –
say upto a limit of Rs. 2,500 p.m.
3.1.2 Increase the limit of exempt education allowance
The present prescribed limit for the education
allowance granted by the employer to the employee to meet the cost of
education expenditure of two children is tax exempt up to INR 100 per
month per child in terms of section 10(14) of the Act, read with
rule 2BB of the Rules. Expenses for hostel fee are fixed @ Rs. 300 p.m.
These exemption limits were fixed in the year 2000 with retrospective
effect from 1 August, 1997. These have become quite nominal considering
the ever rising cost of education and need to be suitably enhanced – say
Rs. 1,000 p.m. for education and Rs. 3,000 p.m. for hostel.
3.1.3 Reimbursement of medical expenses – Present limit unrealistic
The present law is that any sum paid by the employer in
respect of any expenditure incurred by the employee on the medical
treatment of self/family is exempt from tax, to the extent of INR 15,000
per annum. This limit was revised long back and needs to be revisited
in the light of the rising medical and hospitalization costs, especially
for private hospitals. It could be raised to Rs. 25,000 p.m.
3.1.4 Section 80C limit
This section is applicable in cases of all individuals
and HUFs – not only in cases of employees. This exemption has helped the
taxpayers, besides generating savings for the Govt. since many years
now. Over the years, investments made in various avenues available under
section 80C of the Act have helped the Govt. to raise substantial
funds. For the taxpayers, the incentive is savings in tax. However, the
tax benefit is available only upto the extent of Rs.1 lakh in a year for
multiple objectives. The limit of Rs. One lakh was fixed from 1-4-2006
when section 88 of the Act was replaced by this section. The limit of Rs. one lakh needs to be increased suitably – say upto Rs.
2,00,000 or more when it is to be reckoned along with the investments
to pension funds (section 80CCC) and pension scheme (section 80CCD) and
education expenses. As a mater of fact, a separate provision needs
to be enacted for relief for education expenses in the same way as has
been done in the case of medical insurance under section 80D of the Act,
considering the fact that the cost of education has greatly increased
by now.
Further, a distinction between long-term and short-term
savings (like fixed deposit in banks for 5 years) can be thought of.
More deductions can be provided for investment in long-term savings vis-à-vis short-term savings.
In this context, the scheme of EET, namely, Exempt,
Exempt & Tax mooted in the draft DTC, 2009 can be re-looked. The
scheme provides exemption from tax for investments made for earnings,
but provides for taxation of the amount due/received on maturity, if the
same is not re-invested and is used for consumption purposes. This can
be good check on ostentatious spending and form the basis for
expenditure tax. Hence, this proposal can be thought of at the time of
budget exercises for the F.Y. 2014-15.
3.1.5 Deduction for premium on health insurance – Section 80D of the Act
Presently, a deduction of upto INR 35,000 (15,000 for
self/family and 15,000/20,000 for parents) is available to an individual
under section 80D of the Act from taxable income, towards health
insurance premium paid by him for medi-claim insurance, contribution to
CGHS and for preventive health check-ups. The limit for parents is
increased to Rs. 20,000, if the parents are senior citizens. Considering
the fact that India does not have health schemes covering all citizens
like in the USA & the UK and assistance at Govt. hospitals becomes
difficult because of overcrowding there, the limit under section 80D
needs to be suitably increased – say upto Rs. 50,000 from the present
Rs. 35,000.
3.1.6 Deduction in respect of a dependent with disability – Section 80DD of the Act
Section 80DD provides for deduction in respect of
maintenance, including medical treatment of a dependent, being a person
with disability. Fixed deduction of Rs. 50,000 in a year is admissible
for the medical treatment including nursing, training and rehabilitation
of a dependent being a person with disability. The person, for whom
deduction can be claimed must be suffering from the disability mentioned
in the section. A higher deduction of Rs.1,00,000 shall be allowed
where such dependent is a person with severe disability having
disability of 80% or more. The limits were fixed in the year 2003 when
this section was substituted for the then existing sections 80DD &
80DDA and need to be suitably increased because of substantial rise in
costs of treatment.
3.1.7 Deduction under section 80DDB – The limit needs to be increased suitably
The deduction under this section is allowed on satisfaction of the following conditions:-
It can be claimed only by resident Indians for medical
treatment of diseases prescribed by the CBDT under rule 11DD of the I.T.
Rules, 1962. The expenditure should be actually incurred for medical
treatment of the assessee himself or wholly/mainly dependent
husband/wife, children, parents, brothers and sisters of the taxpayer.
If the taxpayer is a HUF, the expenditure should actually be incurred
for the medical treatment of any member of the family, who is
wholly/mainly dependent upon the family. The deduction can be claimed
upto the amount actually spent or Rs. 40,000, whichever is less in a
year. The limit was fixed in the year 2003 and needs to be suitably
increased.
3.1.8 Deduction for rent paid – Section 80GG
Under section 80GG of the Act, the maximum deduction
available to individuals who do not receive an HRA, in respect of rent
paid is only INR 2000 per month. The said limit was revised in 1998 and
is very low in light of the huge rental costs, especially in the metro
cities. The exemption needs to be suitably increased, say to Rs.10,000
per month in view of the huge rental escalation. As in the case of HRA
exemption, the Government may also consider introducing separate limits
for metro and non-metro cities.
3.1.9 Deduction for interest on housing loan
A deduction upto a maximum limit of INR 150,000 is
currently available from taxable income towards interest on loan taken
for acquisition/construction of self-occupied house property, provided
such acquisition or construction is completed within three years from
the end of the financial year in which capital was borrowed and the
capital was borrowed on or after April 1, 1999. With the property prices
and interest rates rising steeply with each passing year, there is a
need to revise this deduction limit, which has become unrealistic by
passage of time. It could be raised to Rs. 2,50,000 in a year.
3.1.10 Exemption for leave encashment
The exemption limit for leave encashment paid at the
time of retirement or otherwise is notified by the CBDT in accordance
with the powers given under section 10(10AA) of the Act. The
current limit of Rs. 3 lakhs fixed in 1998 needs to be raised
substantially in line with increase in limit for gratuity.
3.1.11 Tax benefit for senior citizens
Tax benefits for senior citizens [persons aged 65 years
and more] was thought of for the first time by Dr. Manmohan Singh when
he was the FM. He, in the budget speech for the year 2003-04, said:–
"India will shortly become home to the second largest
number of elderly persons in the world. The population of our elderly,
at present estimated at 76 million, is expected to increase to 100
million in 2013. The interest of the pensioners and senior citizens are
therefore, a particular responsibility of the NDA Government."
The tax benefit to senior citizen was given in the form
of tax rebate under section 88B for the A.Ys. 2004-05 & 2005-06; it
worked upto Rs. 20,000 in tax deduction.
Section 88B was omitted from the A.Y. 2006-07 and from
that year the benefit to senior citizens was allowed in the form of
higher exemption limit. In the course of time, two categories of senior
citizens emerged, namely –
[a] senior citizens in the age group of 60-80 years (category-A), and
[b] senior citizens of 80 years and more (category-B).
Tax benefits for the A.Y. 2013-14 for these two categories were:–
| Exemption limit for general taxpayers [Rs.] | Exemption limits for senior citizens [category-A] [Rs.] | Exemption limits for senior citizens [category-B] [Rs.] |
| 2,00,000 | 2,50,000 | 5,00,000 |
| Less: Exemption limit available to general category of taxpayers | 2,00,000 | 2,00,000 |
| Extra exemption limit for senior citizens | 50,000 | 3,00,000 |
| Tax savings for senior citizens | 5,000 | 30,000 |
Senior citizens in the group of 60-80 years have substantially lost vis-à-vis
what they got when section 88B was in vogue and considering the ongoing
inflation and their advancing age more tax benefits to them are
necessary.
CONCLUDING REMARKS
4. There are many other provisions where
monetary limits fixed have become outdated and no review of the same has
been done since these were introduced, presumably because the DTC was
under contemplation and it was expected that such matters would be taken
care of during the course of DTC's drafting. Unfortunately, DTC
exercises have dragged since the year 2004 [for nearly 10 years now] and
still there is no hope of its finalization in a near future. Hence, the
issues concerning SD and monetary limits, which affect persons with
only moderate incomes, need to be tackled in the Finance Act, 2014 to
save the middle class and low income taxpayers from continued hardship
and injustice, which they have been subjected to since last so many
years with no one interested in championing their cause. It is hoped
that the new FM would be sensitive to the causes of such persons and
suitable action would be taken by amendment of respective provisions in
the IT Act to give relief to such taxpayers, who have been suffering
since long without any relief from the Govt.'s side at the time of
annual budget exercises.
Source: www.taxmann.com
