The Hindu Business Line : Prediction is difficult, especially about future

LONG AGO, Lao Tzu said, "Those who have knowledge don't predict. Those who predict don't have knowledge." While that may sound too harsh on those who engage in exit polls and Budget forecasts, tax writers are never tired of pointing out areas that deserve attention. An earlier article in these columns (Business Line, February 24) looked at tax provisions on salary, house property and business. It also pointed out a few redundancies, and hinted at `unpopular' ideas that are worth trying out in the Income-Tax Act. This article delves into other areas of the Act where a bit of dusting up may help.

Capital gains: Section 45 talks of some of those unpleasant occurrences we have seen recently, such as flood, typhoon, hurricane, cyclone, earthquake and other `convulsions of nature'. However, what can cause more convulsion or, at least, revulsion is Section 45 (1A), which is about taxing gains in amounts received from insurer in respect of capital asset damaged or destroyed. What about cases where the insurer pays conditional compensation, saying he would take it back if the capital asset were to be retrieved? It can be reasonably argued that such compensation should be spared the rigour of Section 45(1A), because the assessee gets a replacement for the lost capital asset, and there is no enrichment from compensation.

There are at least two other areas in `capital gains' requiring changes. These are on indexation, and new house. On the first — indexation — turn to Clause (iii) in explanation to Section 48, where it asks you to take cost inflation index for the first year in which the capital asset was held. Suppose you obtained the capital asset in one of those modes specified in Section 47 (that is, `transactions not regarded as transfer'); then, the indexation is only from the year in which you obtained the asset. As a result, the period of holding of the previous owner is not considered, though Section 49 would factor in the cost to the previous owner for the purpose of determining cost of acquisition. This is an anomaly that calls for correction.

The other issue is about the queer condition prescribed in Section 54F: that the assessee must not acquire another residential house other than the new house which is eligible for deduction under Section 54F.

Thus, if an assessee is able to acquire another residential house from other resources, the munificent benefit of I-T law is denied. One wonders why the tax legislation does not confine itself to the issues of deduction/exemption from taxable transactions, rather than plant hurdles for other eligible deals.

Other sources: Last Budget brought in a change to the gift scene by inserting Clause (v) to Section 56(2). Thus, cash gifts received on or after September 1, 2004 became taxable. An exemption is given to gifts in contemplation of death of the payer; this is similar to gift mortis causa in the erstwhile Gift Tax Act, 1958 (abolished in October 1998). So far so good, but what happens if the payer does not die?

A wicked question, that is, but the problem is more for the living than the dead, and the recipient would have to prove that the gift was given in contemplation of death of the payer who, for all you know, may even outlive the recipient.

This concession may be removed, so ironical controversies may rest in peace.

Chapter VIA deductions: Sections 80DD and 80DDB are benign provisions on care of disabled dependents, and medical treatment. Rather than shackle tax benevolence, it would be appropriate to amend these sections so as to provide that the assessee incurring such expenditure may claim deduction by furnishing proof of expenditure.

Conditions of disability or diseases/ailments may also be removed and any expenditure on medical treatment should be made eligible for deduction subject to proof of incurring such expenditure.

Instead of imposing ceiling for deduction, a person actually incurring expenditure should given reduction in taxable income.

Who does not know Section 80G — the one on tax deduction for donations? But not many know that the Section is one of the longest, with a plethora of conditions such as the ceiling of 10 per cent of total income.

A simpler regime may well be to give 100 per cent deduction except where donations are given to non-government charitable trusts, where the benefit may be halved.

Similarly, Section 80IA may be simplified to provide that any undertaking engaged in the manufacture of any commodity gets 100 per cent deduction up to the assessment year 2015-16 with only a single condition: that the undertaking should not have been formed by splitting up of the existing undertaking or by transfer of second hand plant and machinery.

Slabs and rates: If the Finance Minister were to start taxable slabs from Rs 1 lakh onwards, there can be a rethink on concessions offered under Sections 80U, 80E, 88, 88B, 88C and 88D. A decision on this will not only have to be on revenue considerations but also the admin overheads involved.

There can then be only two rates for individuals, say 15 per cent for taxable income from Rs 1 lakh to Rs 3 lakh, and 25 per cent for income beyond Rs 3 lakh.

For firms, association of persons, and companies, a 30 per cent tax can prevail for income above Rs 50,000. Presumptive tax rates prescribed in Section 115BB for incomes from lotteries, crossword puzzles and so on may be fixed at the flat rate of 25 per cent. Concessional tax rate for long-term capital gains may be removed; as also, surcharge and cess.

Assessment procedure: Four areas demanding thought are due dates, reference for valuation, power of Joint Commissioner, and income escaping assessment. On the first, we can do with only two dates for filing returns: October 31 for assessees whose accounts have to be audited under the Income-tax Act or under any other law; and December 31 for the rest.

Second, Section 142A brought in by the Finance (No.2) Act, 2004 providing for reference to valuation officer has no safeguards for assessees; it would help if a monetary limit were prescribed based on classification of cities and towns before referring cost of construction to valuation officers.

Third, Section 144A confers enormous power on the Joint Commissioner for tax assessment, leading to complaints of abuse of power; to move towards an assessee-friendly image that tax laws strive for, this power may be given to Commissioners of Income-tax, and that too in cases of assessment post-Section 133A survey.

And fourth, Section 147 provides for taxing income, which has escaped assessment; to avert roving enquiries and to be in tune with the decision in the Vipan Khanna case, this provision may be restricted to instances where notice is issued.

"Prediction is very difficult, especially if it's about the future," said Niels Bohr, and so let's remind once again, these are not a peek at what's in the Finance Bill, 2005, but mere wishes of how tax law can be made more beautiful, despite fears of what may come up next week. If things turn worse, you can remember this quote of Mark Twain: "Last week I stated that this woman was the ugliest woman I had ever seen. I have since been visited by her sister and now wish to withdraw that statement."

dmurali@thehindu.co.in

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