K.R. Srivats

New Delhi, April 15

THE Government's proposal to withdraw the existing standard deduction allowed to the salaried taxpayer has not found favour with the Institute of Chartered Accountants of India (ICAI).

The institute has in its post-budget memorandum recommended that the standard deduction under Section 16 of the Income Tax Act 1961 should be continued. Clause 6 of the Finance Bill 2005 proposes to withdraw the standard deduction allowed to the salaried taxpayer.

"Unlike an assessee carrying on business, a salaried person does not get any deduction for expenses incurred for the purpose of employment, though he necessarily incurs expenses for the purpose of employment. It is felt that the withdrawal of standard deduction from the Statute may amount to taxing gross income as against the concept of taxing net income," the ICAI memorandum said.

The institute has highlighted that the basic philosophy underlying the computation of income is that only the "net income" and not the "gross income" should be charged to tax.

The ICAI has noted that the withdrawal of standard deduction is being made as part of the restructuring of the tax rates apparently on the assumption that the standard deduction is an allowance rather than a deduction on account of the expenditure incurred by the employee in the performance of his duties for which he gets paid by way of salary.

The institute has pointed out that up to assessment year 1974-75, the Income-tax Act had a provision for allowing to the salaried persons deductions for purchase of books, car maintenance etc incurred wholly, exclusively and necessarily for the purpose of employment.

From 1975-76, a composite deduction at certain percentage of salary (changed from time to time) was introduced. "Thus the standard deduction permissible under section 16 is intended to cover the expenditure incurred for the purpose of employment and it does not constitute a personal allowance," ICAI memorandum highlighted.

(This article was published in the Business Line print edition dated April 16, 2005)
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