The Hindu Business Line : Salaried are not the favourites

SALARY has a special definition in tax and the law regarding perquisites is rigidly defined. Deductions are specific to salary income. Incomes assessable under business and profession are treated in a liberal manner.

Standard deduction is peculiar to salary cases and even the small benefit of standard deduction may be withdrawn next year if Kelkar has his way. Government salaries are treated differently vis-à-vis salary income in the private sector.

Murmurs against discrimination have been brushed aside by courts.

The new Section 80CCD

The Finance (No. 2) Act 2004 has introduced a new Section 80CCD in the Income-Tax Act, 1961.

It may be remembered that the Central Government had introduced a newly defined contribution pension scheme for new entrants to government service with effect from January 1, 2004.

The scheme makes it mandatory for persons entering the Central Service on or after January 1, 2004, to contribute 10 per cent of the salary every month towards their pension account. The Central Government will make a matching contribution to the account.

Under Section 80CCD, the contribution to the pension scheme will be excluded from income for tax purposes. The accruals will also be exempt from tax. The terminal benefits however will be taxable in the year of receipt. While the contribution is tax exempt, the newly inserted sub-clause (viii) to Section 17(1) deems such contribution made by the Government as perquisite for the purpose of computing income under the head `salary'.

The new Section 7(3) deems contribution by the Central Government to the pension scheme as income deemed to have been received by the employee.

Salary is defined to include dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites.

While the contribution by the employer and the employee will be exempt at the initial stage, receipt of the same on closure or opting out of the pension scheme will mean inclusion in the total income at the time of receipt.

It is also clarified that if the deduction is allowed under Section 80CCD, then no rebate will be available under Section 88 with reference to such amount.

There can be questions with regard to interpretations of the new Section 80CCD. What happens if the pension scheme is closed or the assessee opts out and invests the accrued amount in an annuity plan?

It has been argued by jurists that in such an eventuality there may not be any tax liability.

Business loss

A questionable amendment has been made specifically targeting salaried assesses. At present, Section 71 allows set off of loss under any head of income, other than `capital gains', against income computed under any other head. The loss computed under the head `capital gains' is not allowed to be set off against income under any other head.

This established position is now radically altered by the insertion of a new sub-section (2A) in Section 71. It is now provided that whatever Sections 71(1) and 71(2) may say to the contrary, the loss computed under the head `Profits and gains of business or profession' shall not be allowed to be set off against income under the head `salaries'.

This amendment takes effect from April 1, 2005, and accordingly applies in relation to the assessment year 2005-2006.

It is difficult to understand the logic behind the amendment, barring salaried taxpayers from claiming the benefit of set off in respect of business carried on by them. In making this amendment, where is the abuse feared by the Government? Government servants are barred from carrying on business or profession.

This provision does not apply to salaried taxpayers outside the realm of the Government. As a director of a company, an individual may earn salary.

Such persons may also be carrying on business or profession which may result in losses. The denial of the benefit of set off in such cases is harsh. The new provision will affect sole proprietary concerns and individuals having high salary income and also having business losses to be set off.

These persons will have no option except to carry forward unabsorbed business losses and to set it off in the next year against income from heads other than salary income. The amendment has been obviously framed keeping in view the conduct rules of government servants.

As far as income-tax assessments are concerned, such conduct rules can have no bearing and if the government servant carries on business, it is a matter between him and the Government.

The abuse feared by the Government in respect of the provisions for set off may probably be true in the case of government servants who carry on profession on the sly.

The amendment of the law generalises the inference about abuse and applies the law to salaried taxpayers outside the ambit of the Government. Discrimination is writ large on the face of the amendment.

(The author is a former chief commissioner of income-tax.)