Financial Daily from THE HINDU group of publications
Saturday, Jan 22, 2005
Industry & Economy - Income Tax
Should all deductions and exemptions go?
H. P. Ranina
With no social security scheme for the unemployed, the retired, the uneducated or the terminally ill, Indians rely heavily on savings to see them through their old age. With savings also forming the bedrock of infrastructure creation, the Finance Minister would do well to think carefully before removing exemptions. Parth Sanyal
There is no denying that the main object of taxation is to collect revenue for the larger public good. Other countries, especially some of those in Europe, have a personal rate of income-tax that is much higher than the maximum marginal rate of 30 per cent in India.
However, the striking difference in the Indian context is the fact that the government provides no social security for the unemployed, the retired, the uneducated or those who are terminally ill.
While education and medical facilities are available to some extent in the urban areas, the quality of both falls much below desired standards. Schemes for the unemployed announced from time to time have only scratched the surface of the problem with substantial amounts not reaching the intended target population.
Indians have, therefore, to provide for their old age, their medical needs, the education of their children, and the marriage expenses of daughters. In this situation, far from there being a stigma on tax evaders, such practice is socially accepted and approved in every strata of Indian society.
It is only in the case of a dwindling class of honest tax-payers who declare their income truthfully that the question of claiming deductions, exemptions and benefits arises.
The significant deductions available from the gross total income of an individual are summarised below:
In addition, special deduction of Rs 3,000 is allowed in case of interest on government securities under Section 80-L.
A perusal of these provisions highlights two important facts:
The next set of benefits is in the form of tax rebate under Section 88. One school of thought is that savings need to be increased in India.
Therefore, the tax rebate under Section 88 needs to be enhanced so that a person is eligible to claim a benefit of 20 per cent of the amount invested up to a limit of Rs 1 lakh per annum. This would mean that the loss of revenue can be pegged at a maximum of Rs 20,000 per annum per individual.
Further, this incentive needs to be rationalised by removing the rebate pertaining to repayment of housing loans, the reason being that no incentive should be given for creating a capital asset in the form of residential property, which can be sold at any point of time. Of course, this incentive was given by the government with a view to giving a boost to the construction industry.
The providing of tax benefit as a stimulus to the construction industry has rightly been criticised as an inappropriate measure.
A reduction in excise duty on cement, steel, and other building materials would be far more effective in achieving the objective by making properties more affordable.
But knowing the impact on excise collection, the government has given an indirect stimulus in the form of tax rebate under Section 88.
Perhaps the Finance Minister may look microscopically at the exemption of interest on certain bonds under section 10(15) of the Income-tax Act. Full tax exemption is provided on Post Office Savings account, Public Provident Fund Scheme (8 per cent per annum) and Deposit Scheme for Retired Government employees.
In respect of other schemes, the interest is exempt up to the limit laid down in Section 80-L.
These investments are generally made by professionals and entrepreneurs who have no other means of savings as in the case of employees who have retirement benefits in the form of provident fund, superannuation fund, gratuity, leave encashment, retrenchment or voluntary retirement compensation. The relevance of these provisions, therefore, continues unabated, considering the expectation of falling interest rates over the next 10 years.
One significant benefit which has been removed last year is the unlimited tax exemption under section 10(15) in respect of the 6.5 per cent Relief Bonds issued by the Reserve Bank of India. The Finance Minister has before him three options:
The amendment could have different permutations and combinations with the rate of interest being retained at 6.5 per cent. However, the Finance Minister would do well to keep in mind the need of citizens to save the maximum amount during their working life dictated by three significant factors in an uncertain environment:
Mr Chidambaram is motivated by a vision which transcends the routine Budget formulating exercise. He is determined to tread a new path in fiscal legislation and initiate structural reforms.
To this end, he may consider enacting a new income-tax code which is simple to understand, shorn of legal jargon, which lends itself to a transparent administration reducing scope for harassment and corruption, and, above all, which instils confidence in the honest tax-payer and strikes at the root of tax evasion.
The Finance Minister's desire to raise more revenue has to be in sync with the need of millions of honest tax-payers who wish to perform their duties as citizens.
Savings are not only for the benefit of the individual but form the bedrock of a nation's long-term investment strategy of setting up a huge infrastructure which is part of the Government's "big-bang" policy to sustain economic growth for the next ten years at a level of 8 per cent per annum.
(The author is a Mumbai-based advocate. He can be contacted at firstname.lastname@example.org)
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