Financial Daily from THE HINDU group of publications
Saturday, Aug 28, 2004
Industry & Economy - Income Tax
Why rubbish a `standard' for the salaried
T. N. Pandey
The Task Force has made, inter alia, recommendations with regard to standard deduction admissible to salaried employees.
What is standard deduction?
What is standard deduction?
Standard deduction is in lieu of expenditure (allowed under Section 16 of the Act) incurred for earning salary income and, hence, deductible for working out taxable salary income. Section 16 of the I-T Act, 1961, dealing with deductions from salaries, underwent a vital change from April 1, 1975, when clause (i) was substituted by a new clause and clauses (iii), (iv) and (v) were omitted. Though the amount of deduction has been changing from time-to-time to counteract the impact of inflation, the nature of the Section has remained the same, namely, in the computation of salary income, to compensate for expenses required to be incurred which are incidental to employment.
Gross income not taxable
The I-T Act clearly indicates that the income liable to tax is not gross income but the income remaining after deducting for expenses (as permitted under the Act) incurred in earning the same. 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. In such a situation, the problem is to be resolved on the basis of commercial principles and practices, provided they do not go against the grain of the I-T law.
This principle has been accepted for all sources of income, whether they be salaries, house property, business or profession, capital gains or other sources. In the case of incomes from business or profession, the taxable income (or loss) is to be computed after allowing the expenses, and so on, in accordance with the provisions of Sections 30 to 43 D.
Similar deductions are allowed for income earned from property, other sources and capital gains. If expenditure incurred for earning income from other sources is deductible, there is no rationale for not allowing deduction for expenses incurred for earning salary income. Employment-related expenditure was allowed item-wise till March 31, 1975. And for the sake of simplicity, the concept of giving lumpsum deduction was introduced. Termed standard deduction, this deduction was, obviously, not conceived as donation or charity for the salaried, but in lieu of expenses that were required to be spent for earning salary income.
The reasons given in the Report for eliminating standard deduction are not convincing, and they are as follows:
Augmenting revenue by Rs 4,000 crore: The proposals (alternatives I and II) would lead to a revenue loss, but this it is said can be made good to the extent of Rs 4,000 crore by eliminating standard deduction, that is, by taxing the salaried on gross income and taxing the income from all other sources after allowing for deductions prescribed in the Act. There is, apparently, no justification for such a recommendation.
It is unfortunate that the Task Force, rather than suggest ways to augment revenues (by tackling widespread tax evasion, for instance in the Budget speech, the Finance Minister had said that the number of effective taxpayers is only 13 million in a population of more than a billion) has preferred to tap a source of income to enhance revenues by unjustifiably denying deduction of employment-related expenses for a segment of taxpayers who, by and large, pay their taxes honestly.
The proposal to deny the benefit of standard deduction to salaried employees will send wrong a message, that the Government does not value tax compliance. And this would affect voluntary compliance.
Conveyance allowance in the case of the salaried is tax exempt: This view is totally misconceived. The fact is that most employees, especially in middle-level establishments, do not get conveyance allowance. Further, employees in the private sector do not get such tax-exempt allowances. Hence, to deny standard deduction on the ground that most employees are enjoying tax-exempt conveyance allowance is not right.
Consistent with best international practice: It is wrong to say that not allowing deduction for employment-related expenses is an `international best practice'. The Kelkar Task Force's first report itself shows that this practice is not universally followed, and, in many countries, employment-related expenses are being allowed as a deduction:
Malaysia actual expenditure incurred supported by documentation is deductible.
Indonesia deduction of 5 per cent up to a limit of Rs 1,296 in a year.
Germany a lumpsum of 1,044 euros.
The UK actual expenses incurred.
Japan standard deduction permissible.
France 10 per cent of salary subject to a limit of 12,229 euros.
Thailand 40 per cent subject to a limit of 60,000 baht.
India 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.
Thus, to deny standard deduction on the ground of `best international practice' is factually wrong.
As recommended by several committees: This, too, is not correct. Besides the Kelkar Task Force, only the Shome Panel had recommended the elimination of standard deduction.
Thus, none of the four reasons given in the report justify denial of standard deduction to salaried employees.
If the Kelkar Task Force's recommendation of discontinuing standard deduction is accepted, it would be unfair to a vast majority of salaried employees and frustrate a large section of taxpayers who contribute substantially to the Government's coffers by way of income-tax.
(The author is a former chairman of CBDT.)
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