The Hindu Business Line : A recast of personal taxation

LAST July, as an interim measure, I made a provision under which a person with a taxable income of Rs 1,00,000 would not be required to pay any income tax.

About 1.4 crore assessees got relief. I promised to revisit the subject in this Budget.

As part of a major overhaul of direct taxes, I propose to alter the tax brackets after taking due note of the universal demand of Members of Parliament and the need to provide stability in the medium term.

Accordingly, I propose that the new tax brackets and the new rates will be as follows:

Up to Rs 1 lakh .. nil

Rs 1 lakh to Rs 1.5 lakh .. 10 per cent

Rs 1.5 lakh to Rs 2.5 lakh .. 20 per cent

Above Rs.2.5 lakh .. 30 per cent

Further, the level at which the surcharge of 10 per cent will apply will be raised to Rs 10 lakh taxable income. Hon'ble members will be happy to note that tax-payers in every tax bracket will gain from my proposal.

Exemption limit: Besides, I propose to fix the threshold exemption level for women at Rs 1.25 lakh and the exemption level for senior citizens at Rs 1.5 lakh. These revised exemption levels will be in lieu of the prevailing tax rebate provisions. Given the higher exemption limits and the scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction.

Exemptions to go: There is now a plethora of exemptions, ostensibly intended to promote savings. Some exemptions are based on the principle of deduction from taxable income and some exemptions are based on the principle of tax rebate. I believe the time is ripe to clean up these exemptions. At the same time, it is necessary to encourage savings, and tax relief is a method to induce people to save. Further, I think that the State must be neutral between one form of saving and another, and allow the tax payer greater flexibility in making savings/investment decisions.

Omni-bus deduction: For all these reasons, in addition to the basic exemption limits, I propose to allow every tax-payer a consolidated limit of Rs 1 lakh for savings, which will be deducted from the income before tax is calculated. All prevailing sectoral caps will be removed. The rebate under Section 88 is being eliminated and Section 80L is being omitted to reflect the new regime.

Deductions that stay: In addition to the sum of Rs 1 lakh, the following six deductions will continue to receive the same tax treatment as prevails today:

Interest paid on housing loan for self-occupied house property;

Medical insurance premia;

Specified expenditure on disabled dependant;

Expenses for medical treatment for self or dependant or member of a HUF;

Deduction in respect of interest on loans for pursuing higher studies; and

Deduction to a person with disability.

Towards EET: Tax treatment of savings is a complex issue but we can benefit from the best international practices in this regard. We have already introduced EET-based taxation in the defined contribution pension scheme applicable to newly recruited government servants.

Before we fully migrate to the EET system for all kinds of savings, it is necessary to resolve a number of administrative issues. Hence, without making any change for the present, I propose to set up a committee of experts that will work out the road map for moving towards an EET system.

Bowing to popular demand, I propose to continue the exemption from tax on interest earned on accounts maintained by non-resident Indians.

While the tax reliefs that I have given today should warm the hearts of the tax-payers, I have also an obligation to raise resources, especially to meet the large requirements of NCMP-mandated programmes.

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