Financial Daily from THE HINDU group of publications
Saturday, Jul 03, 2004
The worked up working class
The basic exemption of Rs 50,000, fixed in 1998, needs to be upgraded. While Dr Vijay Kelkar had suggested hiking the exemption to Rs 1 lakh, there is surely a case to bring it to at least Rs 75,000.
Statistics show that the number of taxpayers in the first slab is disproportionately high in a tax-paying population of 33 million. But this is an issue of compliance and the basic law of economics of adjusting monetary levels in tune with inflation cannot be ignored for other reasons.
Similarly, the maximum marginal rate of 30 per cent which is applicable for incomes in excess of Rs 1,50,000 also needs to upgrade to, say, Rs 2 lakh. These adjustments, though may seem trivial for some, would boost the sentiments of the salaried middle-class group.
Business vs employment
One important difference between a businessman and a salaried earner is that the former can manage most of his regular expenditure by setting off against his pre-tax business income, while the latter has to spend on everything from his post-tax income. This outdated differential treatment must be corrected at the earliest. Why is it that a computer used for business purposes is entitled to depreciation, whereas a salaried assessee is not entitled for the same? Often, the salaried individual uses his computer more than a businessman. Therefore, linking depreciation to business alone must be done away with, especially in the era of modern technology.
If standard deduction, still a paltry Rs 20,000, is irrelevant in today's context in respect of income exceeding Rs 5 lakh, it can be dispensed with. Instead, a specified expenditure as a deduction from salary income, including depreciation, may be allowed. After all, the distinction between business/professional income and salaried income in some areas is getting blurred.
Incentives for savings
Much has been debated in the Kelkar Committee Report on the economic rationale of doing away with incentives for savings. There is a need to revisit tax incentives for investments, such as the old regime of Section 80C, which drove investment decisions of yesteryear.
This was primarily because the overall yields on such investments, including the tax advantage, were skewed in favour of the middle class. Any decision to do away with tax incentives for savings cannot be taken in isolation but has to be considered in the overall context of the existing rate of inflation, interest regime and allied factors.
Today, the need is to bolster savings through tax concessions for the simple reason that a salaried assessee needs the cushion of extra yields to drive his investment decision. Hence, it is imperative that the Budget addresses this issue of revisiting Section 80C taking into account the factors discussed.
The process of assessments for the salaried class hassles many. Statistics reveal that a majority of the 33 million taxpayers consists of salaried class. It is clearly established that the monthly cash flows arising from regular TDS is a boon to the Government in managing the revenue collections. This being the situation, every salary return should be accepted at face value, as it exists now.
After all, they have gone through an effective process of assessment by the employer who subjects every component of income paid to the employee through a rigorous test before tax is deducted at source and the TDS certificate issued in Form 16/16AA is virtually an assessment order for all practical purposes.
After all, the Income-tax Act, 1961, has enough leeway to deal with cases of concealment or excessive claims through the regular provisions of law. Dividend distribution tax has definitely simplified the manner of taxing dividend income. Capturing the tax at the source has reduced the cost of collecting this tax. However, some feel that the rate of 12.5 per cent plus surcharge is quite high. Most of the salaried class invest their savings in deposits in various institutions and receive interest subject to tax deduction at source.
The concept of dividend distribution tax can the replicated for interest payments too. The entity paying out interest can be subjected to a distribution tax of, say, `x' per cent and the recipient can receive the interest tax-free. A model which has so far worked well for dividend payments, should work out for interest payments as well, with substantial savings in cost of collection.
Even if a few of these issues were addressed, not only would the overall sentiments/morale of the salaried middle-class improve but also the Government's revenue over the medium-to-long term.
(The author is a Chennai-based chartered accountant.)
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