The Hindu Business Line : Field levelled for deposits

The recent notification on tax deduction for bank deposits redeems the Budget promise of extending the shelter provided to savings made by individuals. The banking industry would have reason to feel satisfied at the turn of events. It had for long complained that its deposit schemes had to compete for a share of the tax-payers' surpluses with certain other instruments of savings that had the added attraction of offering a tax shelter. The Finance Minister had, while presenting the Budget, promised to end such discriminatory treatment, and this has now become a reality.

But it is a moot point if banks will really see any dramatic rise in the level of deposits. For one, potential depositors are unlikely to make any significant changes to their portfolio of tax-deductible savings. This is because, some of the eligible investments may either be imposed by statute — for instance, the provident fund contributions — or are long-term financial commitments — such as the repayment of housing loans and premiums paid on life-insurance policies — rendering any reshuffle a distant prospect. The other major inhibiting factor is the ceiling of Rs 1 lakh on such savings for the purposes of claiming tax exemption. Salaried tax-payers in the middle- and upper-middle income groups — the key targets of such deposits — could reasonably be expected to have breached the ceiling and, hence, would have no incentive to divert their surpluses to avenues not covered under the tax exemption scheme. There is a good case for raising substantially the ceiling, if not abolishing it altogether, if the Government is really committed to providing a level playing field for the banking industry.

The abolition or a substantial enhancement of the ceiling on approved instruments of savings would actually pave the way for the Government to usher in the EET (exempt exempt taxation) regime where contributions and incomes accruing on such contributions are exempt from taxation till such time the accumulated money is withdrawn for consumption. An EET regime that confers on an individual the flexibility to shift the timing of the burden of taxation is incompatible with any quantitative restrictions on the proportion of one's current income that can be shifted to a future date, for tax purposes. Such an approach would also be in accord with the tax regime that corporate assessees are subjected to, where special incentives for investments or accelerated depreciation on assets mitigate to a large extent the burden of taxation on current profits. It is time ordinary individuals, without the privilege of high-pressure lobbyists taking up their cause, enjoyed a level playing field with corporate assessees in the matter of income taxation.

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