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A plan bit too grand

Mohan R. Lavi

Mohan R. Lavi on the new recommendations in the realm of personal taxation

TALKING of reform, Thomas Jefferson once said "The hole and the patch should be commensurate". Like the proverbial Kilkenny cats, tax reform in India never seems to give up.

Apart from the innumerable committees set up over the years, the `Kelkar era' seems to have set it in tax reform.

The latest in the series is the report of the Kelkar Task Force on the Fiscal Responsibility and Budget Management Act (FRBM) which spells out a grand plan to undertake tax reform in India in both direct and indirect taxes.

On direct taxes, the Task Force traces the history of exemption limits, slab rates and peak rates of tax.

In 1949-50, the exemption limit was Rs 1,500, there were four slabs and the rate of tax varied from 4.69-25 per cent. The year 1973-74 saw the exemption limit at Rs 5,000 and 11 slabs, but frightening peak rates of 97.75 per cent as taxes.

The current limit of Rs 1,00,000 and the soft rates of 30 per cent appear a luxury in comparison.

Taking a cue from this, the Task Force reminds us that the 1990-91 exemption limit was Rs 22,000 and extrapolates it to be Rs 59,400 today. A similar exercise carried out for 1998-99 gives a result of Rs 62,940.

With this in mind, the Task Force has recommended two options (see Table).

  • With the exemption limit already at the Rs 1,00,000 level, it is unlikely that one would expect a rollback to lower levels.

    The Task Force has also assumed that all is hunky dory with the exemption limits of 1990-91 or 1998-99.

    If the inflation rates were zero-based from, say, 1980-81, a different result may have resulted.

  • The Task Force records two best practices in personal income-tax. One is christened the EET (exempt exempt taxed) method wherein tax relief is provided on income saved, total proceeds are taxed when withdrawn and interest received is exempted from tax. In contrast, we have the TEE (taxed exempt exempt) method where there is no relief for investment but interest income and gains are exempt.

    The present dispensation of personal income taxation is a jugalbandhi between these two.

    The Task Force recommends eliminating the deductions under Sections 80CCC, 80L and Section 88 which are like a cylinder of oxygen to the heavily taxed salary earner. Instead, the Task Force opts for a scheme nomenclatured ISA (Individual Savings Account) which has two Tiers.

    In Tier 1, the mandatory pension contributions are parked while the other savings are parked in Tier 2. The cap for investment annually is Rs 1,00,000. Withdrawals would not be permitted in Tier I till the contributor attains an age of 60 years.

    The EET method is proposed to tax this account — contributions are fully tax deductible, income and gains are exempt and withdrawals from these Tiers would be subject to deduction of tax at source at 20 per cent.

    However, in a bid not to disturb the present arrangement, "grandfathering" of the existing schemes is suggested — no new investments but existing schemes to continue till expiry.

    In spite of some research, the Task Force does not seem to have come out with anything new on the personal taxation front. It looks like old wine in the old bottle only since some efforts of this kind have taken place in the past, but only a few have found their way into the Finance Bills over the years.

    The salaried taxpayer in India appears to have got immune to rates of around 30 per cent, marginal increase in the exemption limits annually, decent incentives for purchasing a house but no new incentives for saving.

    None of the people in the above bracket have gone below the poverty line. When millions have got used to saying "Grin and bear it" when it comes to personal taxation, any attempt at reform appears an exercise in futility.

    (The author is a Hyderabad-based chartered accountant.)

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