An undeserved denial

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Standard deduction should be reinstated, says T. N. Pandey

T. N. Pandey

SOME of provisions in the Finance Bill, 2005 which needed correction have been set right through amendments that were approved in the Lok Sabha on May 2, 2005. Unfortunately, though, standard deduction (SD) to salaried employees and pensioners remains removed.

This is an affront to the nearly 50-lakh taxpayers in the country who are amongst the most disciplined, contributing substantially to the tax kitty (nearly 25 per cent of the total collections) without straining the tax collection machinery much.

Why should SD be removed on the recommendation of the one-man Task Force of Dr Vijay Kelkar, when a Committee headed by the present advisor to the Finance Minister, Dr Parthasarathy Shome, too had examined the issue only few years back and had merely suggested some reduction in the quantum of SD, and not its total abolition.

The reasons given by the Finance Minister for removing SD are not convincing. Mr P. Chidambaram in the Budget speech had said:

"Given the higher exemption limit and scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the SD."

These grounds do not justify withdrawal of SD, as it is not for personal expenditure and is being given in lieu of employment-related expenses.

Further, the exemption limit has been raised not only for salaried employees but also for all individual taxpayers.

Why SD?

SD is in lieu of expenditure (allowed under Section 16 of the I-T Act, 196) incurred for earning salary income and, hence, deductible for working out taxable salary income. Section 16 of the Act, dealing with deductions from salaries, underwent a vital change from April 1, 1975, by the Finance Act, 1974, when clause (i) was substituted by a new clause and clauses (iii), (iv) and (v) were omitted.

Clauses (iii) to (v) dealt with deduction from salary income of:

i) professional or other taxes;

ii) expenses for conveyance used for the purpose of employment; and

iii) expenses incurred wholly, necessarily and exclusively in the performance of duties, excluding expenses on purchase of books or publications or on entertainment or conveyance, which were covered by clauses (i) to (iv) of Section 16.

Thus, in the case of salaried employees, expenses for earning salary were allowed in the same way as expenses for earning business income and the philosophy that expenses incurred wholly and exclusively for the purpose of earning income are allowable deductions, is fully engrained in the concept of SD, which term was used to represent such expenses limited to the extent provided in the relevant provision.

Notes on clauses of the Finance Bill, 1974, show that change in Section 16 providing for SD from salaries was made to replace the existing provision relating to separate deductions in respect of expenditure on travelling, books, performance of duty, and so on, for rationalisation and simplification by a consolidated deduction termed as SD.

The amount of deduction has been changing from time-to-time to counteract the impact of inflation but the nature remains the same, namely, to compensate for expenses required to be incurred which are incidental to employment in the computation of salary income. It is not in the nature of personal allowance.

Gross income not taxable

The scheme of the Act is clearly indicative of the position that the income, liable to tax, is not the gross income but the income remaining after deducting the expenses incurred in earning the same as permitted under the Act.

Where there is no specific statutory provision for a deduction in the computation of taxable income, it does not mean that there would be no deduction.

The question in such a situation is to be resolved on the basis of commercial accounting principles and practices provided they do not go against the grain of the I-T statute.

This principle has been accepted for all sources of income, whether they relate to salaries, income from house properties, business or profession, capital gains or income from other sources in various sections of the Act.

If expenditure relating to earning of income is deductible in the case of other sources of incomes, there is no rationale for not allowing deduction for expenses incurred for earning salary income, which were allowed item-wise till March 31, 1975. For simplicity, the concept of giving lumpsum deduction as SD was introduced.

Obviously, this deduction was not conceived as donation, charity or personal allowance for salaried persons but in lieu of expenses that are required to be spent for earning salary income.

The Kelkar Committee had recommended its abolition on the ground that in the case of salaried employees, conveyance allowance is exempt.

This is totally misconceived. Employees, especially those in the private sector, do not get such tax-exempt allowances.

Hence, to deny SD on this ground is wrong. Further, conveyance is not the only employment related expenditure in the case of employees.

SD is not a personal expenditure

The observation that SD is a personal expenditure indicates a lack of appreciation of the purpose for which SD is being allowed. It is in lieu of employment-related expenses on books, computers, Web sites, e-mails, employment-related journals and on various other such expenses.

If such expenditure in full can be claimed by businessmen and professionals in computation of their total incomes for tax purposes, there is no ground to deny even token deductions for expenses in the form of SD for salaried employees.

Hence, to say that SD is for personal expenses is misleading and incorrect.

The Finance Minister's view that removing SD is in conformity with growing international practice, too, is not correct.

The Shome Panel's report shows that in many countries, employment-related expenses are being allowed a deduction.

In India, it was i) 40 per cent of total income, subject to a maximum of Rs 30,000 in the case of persons with income up to Rs 5 lakh; and ii) Rs 20,000 in the case of persons whose income exceeds Rs 5 lakh.

There is apparent discrimination between salaried and other taxpayers, as expenses incurred wholly and exclusively for earning incomes are fully allowable in the case of other assessees but no employment-related expenditure will now be allowed for salaried assessees.

The decision to deny SD for salaried employees is unfair. It needs to be restored.

Not doing so would make a big chunk of taxpayers disgruntled and would affect voluntary compliance without much gain to the Revenue.

(The author is a former chairman of CBDT.)

(This article was published in the Business Line print edition dated May 14, 2005)
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