The Hindu Business Line : Standard, dead and buried

THE proposed abolition of standard deduction for the salaried class has been mourned and assailed ever since the proposal was made in the Finance Bill, 2005.

That it has been accompanied by a steep and significant lowering of tax rates across the board has not served to tone down the tirade against the impending move.

Standard deduction was ushered in to take care of the expenses an employee might incur in connection with his employment. To wit, conveyance expenses for going to office and back home, books that he might buy for updating his knowledge et al.

But an honest introspection by the salaried class would show that there is nothing in fact to warrant its continuance. Conveyance expenses after all can be taken care of by the employer.

Indeed transport allowance up to Rs 800 per month has specifically been exempted precisely for this purpose.

And no employee is naïve enough to buy books to update his knowledge unless he is assured of reimbursement by the employer.

In the event, the bottom has been knocked out of the raison d'etre for standard deduction. Its continuance has had a perverse rationale though — to bring about a semblance of parity with the business class. It is common knowledge that the business class manages to pay very little tax, if at all, by claiming huge amount of expenses, the veracity of which has always been suspect.

The tax administration perhaps wanted to partly bring about parity between the two classes by offering the salaried class, which had no such elbowroom to manoeuvre, standard deduction.

Thus the expenses-for-employment line was only an ostensible reason, a fig leaf, for granting standard deduction with the real reason being partial levelling of field for the two classes.

If the salaried class bemoans the demise of standard deduction it apparently should be for the real and not the ostensible reason.

But standard deduction is not the ideal way of bringing about parity between the two classes.

The solution rather lies in standardising the deductions for the business class.

A beginning has been made in the recent Budget by proposing a 30 per cent fringe benefit tax on personal expenses that often pass as those of business.

It is good that the proposal targets not only the corporate sector but also the entire category of business community, including professionals and self-employed persons.

The Working Draft of the Income-Tax Bill, 1997 sought to break new ground in this regard by seeking to tax professionals on presumptive basis — a standard deduction from receipts instead of deduction of actual expenses, the veracity of which is always suspect.

A 30 per cent deduction period was in the mind of the committee, which drafted this Bill.

Perhaps it had taken a cue from the existing regime for taxing income from house property pursuant to which a flat standard deduction of 30 per cent is allowed from annual value of a property.

The draft Bill it seems is gathering dust.

There is no reason why professionals should not be allowed expenses on a presumptive basis.

Similar presumptions should be made on scientific basis for those carrying on business individually or in partnership. A trader or trading firm must be presumed to have made a net profit of 20 per cent of its turnover.

This would not be far-fetched or outlandish. A professional has a greater profit margin. In fact, he has fewer expenses than a trader. A manufacturing firm should also be similarly taxed.

That leaves the corporate sector for which the existing regime, including MAT, should continue till such time a scientific presumptive tax scheme that will stand reason and legal scrutiny is designed.

The limiting of expenditure to 80 per cent for traders would infuse a sense of financial discipline in them besides garnering revenue for the exchequer.

With profit being presumed at 20 per cent of the turnover, the firm will not splurge nor will it be able to cook up its accounts.

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

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