Financial Daily from THE HINDU group of publications
Sunday, Nov 10, 2002
Financial Daily from THE HINDU group of publications Sunday, Nov 10, 2002 |
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Investment World
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Income Tax Columns - Tax Talk Kelkar tax proposals — Set to hit salaried class hard T. Banusekar
LOOKING at the proposals on direct taxes made by the taskforce headed by Dr Vijay Kelkar as a whole, it is clear that, if implemented, they will hit the middle class and senior citizens hard. One look at the accompanying table may be enough to make a middle class assessee squirm. Also, an overall look at the recommendations in relation to personal taxation reveals that it is highly skewed to the detriment of the middle-class taxpayer. The table, which also shows the effective tax that will be payable by two different segments of tax payers, reveals how a middle-class tax payer will end up with a substantially higher burden of tax. The recommendations also clearly reveal that the higher income segment will hardly be affected by these proposals. Over a period of time, it appears, the taxation policies are becoming more and more pro-rich, while at the same time hurting the middle-class. It is very surprising to note that no study has been made of the impact that these recommendations will make on the middle class.
More tilted sops
It has been recommended that there should be no tax on long-term capital gains on transfer of equity shares. It has also been suggested that the status of resident but not ordinarily resident should be removed and they should be taxed on par with a resident and ordinarily resident. This proposal is likely to affect persons who visit foreign countries and earn money in foreign currency.
Tax rates
On the rate of tax, the taskforce has suggested that the personal taxation should be on a two-tier basis with a basic exemption of Rs 1,00,000. The slab rates that the taskforce has recommended is as follows:
Deductions
In lieu of the increased basic exemption that will be available to tax payers if the recommendations are accepted, tax payers who are salaried assessees will lose the benefit of getting a standard deduction even if their salary is below Rs 5,00,000. The taskforce is of the opinion that since the exemption is already available to the extent of Rs 800 p.m. in respect of expenditure that may be incurred for commuting from residence to office and back, a further standard deduction is not required. It is felt that the taskforce does not realise that in the present context, a sum of Rs 9,600, which is the exemption that can be availed for commuting between the office and residence, is too paltry a sum. Taxpayers will also lose the benefit of claiming interest in respect of amounts borrowed by way of housing loan for a self-occupied property if the recommendations are accepted. It is proposed that the claim by way of interest should be removed in a phased manner over a period of three years reducing it to Rs 1,00,000 in year one, Rs 50,000 in year two and nil in year three. This, the task force feels will be based on the principle of fairness for the income from such property, which is self-occupied, is treated as nil. The following deductions, which are presently available under chapter VI-A to an individual, are also recommended for removal:
Further, the task force also recommends that dividends from domestic companies should be fully exempt in the hands of the shareholders.
Rebates
It is however recommended that a rebate be made available in respect of medical insurance premium @ 20 per cent subject to a maximum of Rs 3,000 and @ 20 per cent in respect of the medical expenditure incurred on specified ailments subject to a maximum of Rs 4,000 (only in the case of senior citizens). The taskforce has also recommended that a rebate be made available in respect of educational loans @ 20 per cent subject to a maximum of Rs 4,000. This deduction is presently available u/s 80E up to Rs 40,000. The taskforce also recommends that all rebates presently available u/s 88, which is available for making certain kinds of investments up to a maximum of Rs15,000; u/s 88B of Rs 15,000 for senior citizens and u/s 88C of Rs 5,000 for women below the age of 65, should go. The reasons given by the taskforce are that such rebates are not available in other countries and further that the rebate for investments tends to push up the overall cost of borrowing of the Government.
Rebate as `social security'
The taskforce would do well to remember that the rebates available u/s 88B to senior citizens and u/s 88 for investments were basically a mechanism which was intended to provide some kind of security to senior citizens and induce investments which would come in handy on retirement, particularly in the absence of social security.
Stress on service
On the positive side, it must also be stated that the recommendations of the taskforce in respect of taxpayer service, suggestions for improvement of the mechanism for granting refunds and several other suggestions for administrative improvements are most welcome. The taskforce in its recommendations has placed a great deal of stress on the quality of tax payer service and has urged that the expenditure on such tax payer service should be increased from the present 1 per cent to at least 5 per cent of the total expenditure. The recommendations have also suggested far reaching changes on the administrative mechanism, including giving the Board larger administrative powers and financial independence coupled with responsibility. The taskforce also recommends that the present mechanism of granting refunds to assessees is too cumbersome and time consuming, and that a more efficient mechanism must be developed for the same through the process of computerisation. This, the task force feels, will reduce the grievance of assessees to a large extent.
Not so comparable
It is surprising that the taskforce has made a comparative study of the taxation prevailing in several other countries, including Canada, France, Germany, Italy, Japan, Netherlands, Sweden, United Kingdom, United States, Thailand, New Zealand, Malaysia, Indonesia, Philippines, Argentina, Peru, Australia and Singapore. Comparisons have to be made carefully. Most of these countries have a high per capita income and are, as economists would say, the advanced countries. It is felt that the taskforce does not realise that the tax structure of a foreign country cannot be directly imported and copied into India. Most foreign countries have a system of social security to help the unemployed and the aged, which is not the case with India.
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