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Opinion - Taxation


A fond list of hopes

T. C. A. Ramanujam

T. C. A. Ramanujam on tax sops that the Budget can offer the middle class

THE interim Budget to be presented in Parliament on February 4 can be safely expected not to give shocks to any section of the public by way of adverse alteration of the tax law. It can, however, throw some pleasant surprises. The middle class will be hoping for some tax relaxations. Already, pensioners and salaried taxpayers with incomes up to Rs 1.5 lakh have been exempted from the need to file tax returns.

As per the press statement issued, the TDS certificate is as good as an assessment. Pensioners have also been exempted from the one-by-six rule. There will, therefore, be a Finance Bill to give statutory recognition to the press announcement of the Finance Minister. The occasion can, therefore, be utilised for making benevolent adjustments in the tax.

The Kelkar panel recommendation

The Kelkar Task Force had made significant recommendations for raising the tax exemption limit from the current Rs 50, 000 to Rs 1 lakh. In 1973-74, the tax rates of 10 and 20 per cent were applicable for incomes up to Rs 10,000 and Rs 20,000 respectively. Adjusting for inflation, the corresponding income levels of Rs 60,00 and Rs 1,50,000, as at present, are much lower than what the inflation figure will indicate, namely, Rs 1 lakh and Rs 2 lakh in 2001 and 2002, respectively.

There has, thus, been an increase in the real tax liability. Though the top marginal tax rates have come down, the tax liability at the middle level has gone up. Tax rate reductions have benefited the upper classes and the middle level of income earners have to face a higher tax liability. The Kelkar Task Force had recommended the following personal income-tax structure:

Below Rs 1,00,000 — Nil;

Rs 1,00,000-4,00,000 — 20 per cent of the income in excess of Rs 1,00,000;

Above Rs 4,00,000 — Rs 60,000 plus 30 per cent of the income in excess of Rs 4,00,000

There can be no two opinions on the question of raising the basic exemption limit from Rs 50,000 to Rs 1,00,000. This limit was fixed in 1998-99. The number of taxpayers has gone up from 175,78,326 to 344,07,380 in the five years since. Tax collections from income-tax and corporate tax are expected to touch an all-time high of Rs 1,00,000 crore.

Whatever reservations the Finance Minister may have about the personal income-tax structure recommended by the Kelkar panel, he can have no second thoughts on the question of raising the basic exemption limit from Rs 50,000 to Rs 1,00,000. The tax rates of 10, 20 and 30 per cent can probably be continued and the surcharge, totally eliminated.

The Kelkar panel has shown that the data from 1965-66 onwards did not indicate a fall in the number of taxpayers even when exemption limits were raised.

Standard deduction

As at present, the salaried get standard deduction when the salary does not exceed Rs 5,00,000. They are also allowed conveyance expenditure of Rs 9,600. The Kelkar task force has exploded the myth that the effective tax burden on the salaried class is greater than on those deriving income from self-employment or business. It has shown in its Table 4.4 how the salaried class gets tax-free perquisites, such as conveyance allowance, standard deduction, medical facilities, telephones, leave travel allowance, and so on, apart from confessional tax treatment for residential accommodation, use of motor car and house rent allowance. It has shown that all these perks are taxed in the hands of the self-employed.

In Table 4.5, the Kelkar panel has shown that no deduction is allowed to employees for expenses in Bangladesh, Singapore, Italy, New Zealand, Sri Lanka, the Philippines, the Netherlands, Argentina, Peru, Australia, the US and Canada. India alone hands out all sorts of liberal perquisites and allowances for the salaried class. It is necessary that the scheduler system of taxation be done away with and all incomes taxed uniformly.

A beginning can be made by abolishing employee-related concessions and deductions in computing the income. This may not be an opportune time for moving in this direction. However, the Finance Minister can resist the temptation to raise the standard deduction. Instead, the Government should think of removing the ceiling on tax-related savings and enable taxpayers to utilise tax rebates on whatever quantum of savings in the specified manner that they can make within their known sources of taxable income.

Pensioners and senior citizens will be happy with every rupee of tax concession. The exemption limit for pensioners can easily be raised to Rs 2 lakh without loss of the Revenue. Mr Jaswant Singh has announced Dada-Dadi bonds from April 1, 2004, and one way of making these attractive will be to make the interest tax-free.

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