The Hindu Business Line : Dated monetary limits in the I-T Act

The I-T Act fixes monetary limits for various purposes. Though changes have been made to these limits, most of them are still unrealistic and need to be reviewed.

Monetary limits in the Income-Tax Act and the Wealth Tax Act are fixed for various purposes, such as giving exemptions and concessions, compliance to various provisions, etc. Changes have been made to these limits, but mostly in an ad hoc manner.

In many cases, because of inflationary pressure and the consequent fall in the value of rupee, such limits have become unrealistic and need to be reviewed. What follows are a few examples where the monetary limits need to be reviewed.

Under the I-T Act

Basic exemption limit: The one monetary limit that affects most taxpayers, especially individuals, Hindu undivided families (HUFs) and association of persons (AoPs), is the basic exemption limit, which is the threshold income limit above which tax becomes payable. This is one limit that gets reviewed at the time of the presentation of the Finance Act.

In the past few years, the changes made to the exemption limit have been as follows: 1992 — limit raised from Rs 22,000 to Rs 28,000; 1993 — Rs 30,000; 1994 — Rs 35,000; 1995 — Rs 40,000; 1998 — Rs 50,000; 2004 — the limit was kept at Rs 50,000, but it was provided that the excess income above Rs 50,000 up to Rs 1 lakh would be rebated; and 2005 — the limit was enhanced to Rs 1 lakh, dispensing with the concept of `rebating'.

The limits in different years have been set on an ad hoc basis, without any empirical studies or statistical data to support the quantum of the increases made.

Tax brackets: What has been said about basic exemption limits equally applies to tax brackets. These too have been tinkered with without much study.

Exemption under Section 10(32): In case the income of an individual includes the income of minor child, in terms of Section 64(1A), such individual shall be entitled to exemption of Rs 1,500 in respect of each minor child if the income of such minor as includible exceeds that amount. Sub-section (32) in Section 10 was inserted w.e.f. April 1, 1993. The limit of Rs 1,500, fixed more than 14 years back, has become unrealistic and needs to be reviewed and suitably raised.

Section 40A(3): Where an assessee incurs any expenditure in respect of which payment in excess of Rs 20,000 is made otherwise than by a crossed cheque or crossed bank draft, 20 per cent of such expenditure shall not be allowed as deduction. The limit of Rs 20,000 has been operative w.e.f. April 1, 1997. Continuing with the limit for nearly 10 years makes a strong case for its revision.

Compulsory audit (Section 44AB): This section was incorporated in the I-T Act w.e.f. assessment year (AY) April 1, 1985, for compulsory audit by a chartered accountant. The limits fixed were: a) in business, where total sales, turnover or gross receipt in a year exceed Rs 40 lakh; b) in the case of professions, where gross receipts in a year exceed Rs 10 lakh.

No review of the monetary limits, fixed some 22 years back, has been done.

Sections 269SS and 269T: Sections 269SS (on the mode of taking or accepting certain loans and advances) and Section 269T (on the mode of repayment of certain loans and deposits) were inserted in the I-T Act w.e.f. April 1, 1984 and July 11, 1981, respectively, and the monetary limits fixed for the application of these provisions were:

Section 269SS — Rs 10,000 up to March 31, 1989. Thereafter, it was changed to Rs 20,000 from April 1, 1989.

Section 269T — It was Rs 10,000 for repayment of deposits (loans also w.e.f. April 1, 2002) with interest since inception, that is, July 11, 1981. However, the Rs 10,000 was raised to Rs 20,000 w.e.f. April 1, 1989.

The limits have not changed since April 1, 1989, and the review is long overdue.

Monetary limits for tax deduction at source (TDS): These limits are different for various sections and have been prescribed not on any well-thought-out or laid down principles but merely on an ad hoc basis. In many cases, the figure adopted is Rs 2,500, which too has not been revised for long.

Monetary limits specified by I-T Rules and Notifications: Specific allowances, which are exempt from tax in computing income from salary, are given in rule 2BB. The exemption will be allowed in respect of any such special allowance or benefit which is not in the nature of a perquisite within the meaning of Section 17(2) and which is specifically granted to meet expenses wholly, necessarily and exclusively in the performance of the duties of an office/employment of profit, as notified by the Central Government in the Official Gazette.

Some of the limits that are apparently very low and applicable from August 1, 1997, and which need to be revised are:

i) Special compensatory allowance in the nature of composite hill compensatory allowance, high-altitude allowance, uncongenial-climate allowance, snowbound area allowance or avalanche allowance for certain specified areas — Rs 800 per month.

ii) Siachen area of Jammu and Kashmir — Rs 1,700 per month.

iii) All places located at a height of 1000 metres or more above the sea level, other than places specified in (i) and (ii) — above Rs 300 per month.

iv) Special compensatory allowance in the nature of border-area allowance, remote-area allowance, difficult area allowance or disturbed area allowance in regard to notified areas — Rs 1,300 per month.

v) Tribal area allowance for certain areas — Rs 200 per month.

vi) Children education allowance — Rs 100 per month per child up to a maximum of two children.

vii) Allowance granted to an employee to meet the hostel expenditure of children — Rs 300 per month per child up to a maximum of two children.

These are only illustrative examples.

The monetary amounts declared as exempt were initially notified in 1989 and later reviewed in 1997. A review in regard to these has become long overdue.

Wealth Tax Act

The basic exemption limit of Rs 15 lakh under the Wealth Tax Act and other limits under this Act are quite liberal and no review of the same seems necessary.