The Hindu Business Line : Give salaried a tax break

In a situation where taxes are not indexed to cost inflation, the Government is left with the only option of raising the exemption limit. Tax rates have been moderated and there may not be scope for reducing the rates further.

Salaried taxpayers are looking forward to restoration of standard deduction.

T. C. A. Ramanujam

Even when the Interim Budget was presented in February 2009, there was expectation of relief on the personal tax front. But prudence prevailed and the temptation to go in for populist measures was given up.

The time has now come for fulfilling the raised expectations. As usual, the taxpayer expects relief. In a situation where taxes are not indexed to cost inflation, the Government is left only with one option — of raising the exemption limit. T ax rates have been moderated and there may not be scope for reducing the tax rates further.

Corporate tax rates in India compares well with those in the US and the UK. Problems however remain when the nominal rate goes up because of surcharges. The taxpayer will be happy to pay tax at one prescribed rate.

Abolition of all surcharges will simplify the tax structure. May be, there can be a small upward revision of tax rates to compensate the revenue loss. In 1984-85, the then Finance Minister surprised taxpayers by cutting taxes across the board by 5 per cent. The middle classes can be kept happy by raising the basic exemption limit and abolishing the surcharges.

Standard Deduction

Salaried taxpayers are keenly looking forward to restoration of standard deduction. The abolition of standard deduction by the Finance Act 2005 brought in a lot of inequity in the matter of taxing the salaried class, who had got used to the deduction for nearly 30 years.

The salaried class has no of resorting to tax planning for claiming expenditure. Conveyance allowance of Rs 800 a month is a pittance. Inflation has pushed up nominal earnings, and real incomes are low. The business class is at an advantage, as it can claim all sorts of deductions relevant to the earning of business income.

Economists argue that it makes sense to put more cash into the pockets of consumers. This will boost spending and indirectly contribute towards tax collections. Significantly, the Institute of Chartered Accountants of India (ICAI) has pleaded for restoration of standard deduction. At the time of its abolition, standard deduction stood at 40 per cent of salary or Rs 30,000, whichever was less, for those whose income was less than Rs 5,00,000. Above this limit, it was allowed at Rs 20,000. Acceptance of the Kelkar Committee’s recommendation caused a lot of heartburn among the salaried class. The time for redressal has arrived.

New Pension Scheme

The Government has rolled out the NPS w.e.f. May 1, 2009. Unfortunately, there are no takers for the scheme. The failure of the scheme to attract investors has much to do with the the tax aspect.

Investments in NPS are exemp under Section 88CCC of the I-T Act, with a cap of Rs 1,00,000. Interest accrued on this income is also exempt. But at the time of withdrawal, the entire amount is taxed. This will certainly nullify the benefits of the first two exemptions. Private sector employees deposit provident funds with the Employees’ Provident Funds Organisation (EPFO). There is exemption from tax in this case.

Again, an employee who joined the Government before January 1, 2004, will be governed by the old pension rules and the old scheme of taxation. There is discrimination in the tax treatment under the old and the new pension schemes. It will be fair to revert to the EEE (Exempt, Exempt, Exempt) scheme from the present EET (Exempt, Exempt, Tax) mode of taxation for the NPS.

Pensioners, Senior Citizens

The Sixth Pay Commission’s recommendations have raised the earnings of salaried employees and pensioners quite substantially. But a third of such enhanced salaries and pensions will revert to Government by way of income-tax.

In the absence of a National Health Scheme on the lines of the model prevalent in the US and the UK, there is strong case for exempting senior citizens with incomes below Rs 3 lakh from tax.

Housing

Deductions from incomes under the head ‘property’ require a re-look. Raising the limits of the deduction limit towards repayment of housing loans and interest will certainly give a boost to middle class housing schemes. This suggestion has the backing of the Government.

Such a measure will see the mushrooming of small houses, which will help raise the employment potential.

(The author is a former Chief Commissioner of Income-Tax.)

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