The Hindu Business Line : Marginal relief marginalised

BEFORE Budget 2004 was presented, there were eager expectations that the tax rates would be cut and the exemption limits raised. One had also expected surcharges to be removed and the tax slabs beneficially altered —

the minimum exemption limit of Rs 50,000 has been in place from 1998-99.

The Kelkar Task Force had, in fact, recommended raising of the exemption limit to Rs 1,00,000, a 20 per cent tax rate on the income slab Rs 1,00,000 to Rs 4,00,000 and 30 per cent on incomes above Rs 4 lakh. It also suggested the removal of the surcharge.

The Finance Minister, Mr P. Chidambaram, appears to have had reservations on the Rs 1,00,000 exemption as that would result in 1.4-crore assessees going out of tax records. The Kelkar Task Force had considered this fact and observed that the apprehension seemed to be misplaced, given the package of administrative and policy reforms and the empirical evidence. At any rate, processing the 1.4-crore-odd returns only adds to the Department's workload, giving it no tax benefit either.

Marginal relief

In situations like this, it is normal for Finance Acts to provide for marginal relief, but the latest one is significant in its failure to do so. As long as income is Rs 1,00,000 or below, there is no tax impact. However, the moment this threshold is crossed, the assessee will be visited with full tax incidence of Rs 9,000 plus a cess of 2 per cent on tax. This is an anomalous situation calling for rectification before the Finance Bill is finally passed.

Family pension

Mr Chidambaram has exempted certain categories of family pensions from income-tax. Under the proposal, family pension received by widows, children and nominated heirs of members of the armed and paramilitary forces killed in the course of operational duty will be exempted from income-tax.

The Finance Minister calls this measure a humble salute to their supreme sacrifice. A new sub-clause 19 has been inserted under Section 10 for this purpose. The proposed amendment will take effect from April 1, 2005, and will, accordingly, apply to assessment year 2005-06 and subsequent years.

The exemption could have been extended to all categories of family pension. After all, only those without much fallback receive family pension.

Even in respect of family members of the armed forces personnel killed in action, the exemption is hedged in with conditions to be prescribed. It takes effect only from assessment year 2005-06. This amendment could have been made retrospective to cover families of those killed in the Kargil war.

New Section 88 D

To give rebate on incomes up to Rs 1,00,000, the Finance (No. 2) Bill has introduced a new Section 88D in the Income-Tax Act, 1961. From a mere perusal of the section it can be seen that it applies to `an assessee being an individual residing in India'.

It, therefore, does not apply to non-resident Indians; nor to Hindu undivided families and other categories of chargeable entities under the income-tax law.

The exemption itself is restricted and talks of rebate. Further restriction of the same to individuals alone makes it appear to be a totally half-hearted measure. The approach to the subject could have been more liberal.

(The author is a former chief commissioner of income-tax.)