Income Tax Relief In Budget

Little tax relief on the cards-Business Standard

Finance Minister Arun Jaitley may not raise I­T exemption limit to Rs 5 lakh

 

When Finance Minister Arun Jaitley turns to part-B of his Budget speech on July 10, the common man may be left disappointed. Taxpayers expecting the income tax exemption limit will be raised to Rs 5 lakh or the deduction limit to Rs 2 lakh might have to settle for a marginal adjustment in the slabs.

While reports have said ahead of Assembly elections in a few states, the government wants to give some tax relief to individuals, the disposable incomes of whom have been depleted by the high inflation, the trade-off between this and keeping the government's fiscal deficit low will be difficult.

Even if the tax exemption limit is increased to Rs 3 lakh, the loss to the exchequer will be Rs 30,000 crore. Similarly, if the deduction limit under section 80C of the Income Tax Act is doubled to Rs 2 lakh, there will be an additional loss of about Rs 30,000 crore.

Tax experts say the government might not increase both the limits substantially, though a total increase of at least Rs 1 lakh crore is needed, as persistently high inflation had eroded household savings. "The government should give some benefit to people; there might be other ways to offset the revenue loss by cutting subsidies, higher disinvestment or improving compliance. If it is raised to Rs 3 lakh, it is a nominal increase," said Divya Baweja, senior director, Deloitte.

Vikas Vasal, partner, KPMG, said either the exemption limit or deduction limit should be raised. He added the latter would serve the dual purposes of providing relief to taxpayers and giving a push to the infrastructure sector. Currently, the government allows tax-free investment up to Rs 20,000 in infra bonds.

Besides infrastructure, the government might also consider increasing the limit for health insurance. Currently, deduction is allowed for health insurance premium up to Rs 15,000 for self, and an equal amount for dependent parents. While the government will aim to give tax relief to the inflation­struck small taxpayer, an across-the-board increase in the exemption limit will benefit all taxpayers.

As such, the finance ministry

could replicate a step taken in last year's Budget, when the government had proposed to provide a tax credit of Rs 2,000 to every person with a total income of up to Rs 5 lakh, benefiting 18 million taxpayers. The exchequer, however, took a hit of about Rs 3,600 crore.

If tax slabs are adjusted according to the recommendations of a standing committee - Rs 3­10 lakh (10 per cent tax), Rs 10­20 lakh (20 per cent), and Rs 20 lakh or more (30 per cent) -, the government will take a hit of Rs 60,000 crore. This recommendation was turned down by the finance ministry under the previous regime. A concern is the move will further erode the already-low (about 33 million) tax base. If the slab is raised to Rs 3 lakh, 87 per cent taxpayers will escape the tax net, against the current 72 per cent (with annual income of up to Rs 2 lakh).

"Given the high inflation, the tax exemption limit should go up by Rs 1 lakh. I recognise the fact that a huge number of taxpayers will go out of tax net, but they don't contribute much to the total tax collections," said Amarpal Chadha, partner, EY.

The tax collected from the Rs 2­10 lakh income bracket is about Rs 21,094 crore (from about 27 million taxpayers), while that collected from about 335,000 taxpayers in the Rs 10­20 lakh income group is Rs 10,185 crore. About 185,000 taxpayers in the income group of more than Rs 20 lakh contribute Rs 53,170 crore.

What worries the finance ministry more than a section of taxpayers going out of the tax net is the fact that it won't get a lot of information that comes with returns. And, if the ministry makes it mandatory for everyone to file returns, there won't be a fall in administrative costs.

To cut the government's administration costs and focus on higher income-group taxpayers, a parliamentary standing committee headed by Bharatiya Janata Party leader Yashwant Sinha had suggested four slabs. It had also proposed the deduction limit for investment in long-term savings be increased from Rs 1 lakh to Rs 1.5 lakh, while the deduction limit towards life insurance premium, health insurance premium and tuition fee be increased to Rs 1 lakh. Currently, deduction is allowed for health insurance premium up to Rs 15,000 for self and Rs 20,000 for dependent parents.

 

Link Business Standard

An Appeal Made By Salaried Class

An open letter to finance minister from salaried class-Hindustan Times-26th June 2014

The patriotic salaried class has a lot of expectations from the Budget.  Finance minister Arun Jaitley is meeting representatives from corporates, banks, financial institutions etc., to know what their demands are. He hasn't met the salaried class and did not respond to a tweet that he should meet employee representatives as well.

The salaried class is being taken for granted by governments day in and day out as they don't represent a big chunk of voters, don't vote en-block and some don't vote at all.

But this time, the salaried class people rallied behind Prime Minister Modi. In one of his election speeches, Modi described the salaried class as the "biggest patriot" ('sabse bada deshbhakt'). The employee class expects a lot from him.

In India, approximately 3.5 crore people (<3% of the population) pay income tax. Out of these only 0.1% people have reported income of > Rs. 1 crore. This is abysmally low considering the fact that 30,000 luxury cars (Audi, Mercedes, BMW, Jaguar Land Rover, Volvo) are sold in the country each year. Further, out of the 3.5 crore tax payers, more than half pay negligible amount of tax ranging from Rs. 50 to Rs. 1,000.

These include professionals like chartered accountants, doctors, lawyers, architects etc. This reduces the effective tax base to 1.5 crore consisting mostly of salaried class people.

The salaried class must have committed some sin in their previous lives, that's why it is carrying on the burden of the entire individual tax collection target on its shoulder. All governments have treated it as the milch cow to fill its coffers. The salaried class is reeling from high inflation levels and poor hikes/bonuses for past the few years in line with low GDP growth.

The following will demonstrate that there is discrimination against the salaried class.

(i) A salaried person pays tax (employer deducts tax and deposits the same on his behalf with the government of India) as he earns his income (each month in advance). No other category of tax payer -– company or self-employed or businessman -- is required to pay advance tax each month. Advance tax has to be paid on the 15th of September, December and March — in installments of 30%, 30% and 40%, respectively— by the self-employed and businessmen.

Companies need to pay it on the 15th of June, September, December and March. So why does salaried class need to pay tax each month? What is the logic? Can anyone explain? In countries like Singapore, a salaried employee needs to pay tax on income in next financial year, ie., for income earned in CY13, tax needs to be paid in CY14, no advance tax.


(ii) Let's take an example of two chartered accountants A & B residing in Mulund, Mumbai. A works in a bank in Mumbai and B has his own practice (entrepreneur). Both have their offices in Bandra Kurla complex and both of them drive to office. They both spend around Rs. 10,000 on petrol bills. While A (salaried) gets tax benefit of only Rs. 800 out of Rs. 10,000 spent (8%), B can claim the entire amount as a deduction from his income. There is no limit on the amount a professional like B can claim as deduction for conveyance. This is ridiculous though one may argue that this encourages entrepreneurship.


(iii) Let's continue with the same example. A goes to a nearby restaurant for lunch and spends Rs. 150-200 per day. B also has lunch outside but can claim the entire amount as business development expense from his income. That's how these professionals pay almost nil tax.

(iv) A & B both buy Honda City for Rs. 10 lakh and take loan of Rs. 8 lakh. A does not get any tax benefit on the EMI of Rs. 17,000 per month. B can claim the entire interest expense as a deduction from income. Further he can also claim depreciation on car.

(v) Interest on self-occupied house/property is exempt upto Rs. 1.5 lakh per annum. If a company/professional buys a building or a flat financed by a bank, is there a cap on interest it can claim as deduction. Anybody? No cap. So why is this rule for salaried class?

The standard deduction was meant to compensate salaried people for the fact that self-employed small businesspersons or entrepreneurs pay tax only on their net income after deducting business expenditure. This was also done way in 2005-06 by Chidambaram. However, this was very paltry anyways.
The demand of salaried class is to treat them at par with self-employed people and allow all expenses as deduction from income, this will bring parity and improve sentiment. They should be taxed based on net income like corporates/self-employed/professionals.

This is not the only lacunae. Some of the deductions allowed under the head salaries have been unchanged for ages.
(i) Conveyance/transport allowance of Rs. 800 per month was announced in the early 1990s. In Mumbai, if you travel by car you spend minimum Rs. 10,000 per month on fuel. If you travel by train your monthly pass for train (1st class) is Rs. 600-700 plus you need to spend minimum Rs. 50 per day on auto/taxi to reach the station from office/home.

This makes it Rs. 2,000 per month on an average. Even if we assume an average inflation of 5% for the past 2 decades, this allowance should be at least Rs. 2,000 (inflation adjusted).

(ii) Interest on self-occupied house/property is allowed as deduction for upto max of Rs. 1.5 lakh since 1999. Property rates have zoomed up significantly since then (prices in Mulund in Mumbai for example which were Rs. 1,000-1,500 per square feet in 1999 has zoomed upto Rs. 15,000 per square feet currently, 10 times the 1999 figure). By this logic the deduction should be Rs. 15 lakh at least.

(iii) Additionally, Rs. 1 lakh is exempted for principal payment but this is covered under Sec. 80 C with other investments. If you buy property worth Rs. 25 lakh today and take loan of Rs. 20 lakhs (80%), your EMI would total Rs. 2.5 lakh per annum and your entire interest expense plus principal can be deducted from income. Where is a flat available for Rs. 25 lakh in Tier I cities in India today, not even Tier III cities perhaps.

(iv) Medical expenses upto Rs. 15,000 is exempt from tax for the family. This was introduced almost 15 years ago. This is too low considering in cities like Mumbai where one visit to a doctor costs Rs. 1,000 excluding cost of medicines. Again here, taking into account inflation, this should easily be doubled.

(v) Child education allowance of Rs. 1,200 per child for maximum 2 children is exempt. This works out to Rs. 100 per month. But even in slums and villages there is no school which has such low fees. In Eurokids, the fee is Rs. 35,000 for play school leave alone school education.

With the government's focus on education, salaried professionals who wish to pursue higher studies (CFA, FRM, PhD etc.) should be given a deduction for the fees paid. This will lead to increase in technical skills of the workforce in India.

The demand of salaried class is to substantially hike the caps for all these allowances just by purely taking into account the inflation aspect.
Not only this, the salaried class suffers from double taxation (indirect taxes) – service tax, sales tax etc -- which makes everything costly for him. Plus, effective tax rates of companies like Reliance and State Bank of India which earn US$ 3.5b+ is 21% and 17% respectively. The effective tax rate is 25-26% for people earning Rs. 30 lakhs and above. How is this justified?

Fewer taxes would increase the disposable income in the hands of salaried people. What would they do with this high income, they would spend the same or invest. Either ways it is good for economy.

The efforts of the government should be to increase the tax net and not milk the cow in their hands (salaried class). Any shortfall in income tax collection from salaried class should be made up by taxing more people who are paying zero taxes and leading lavish lifestyles including politicians.

By the way, income of MPs and MLAs is exempt.

The government is believed to be thinking of increasing the income exempt from tax  from Rs. 2 lakh to Rs. 3 lakh. But this is merely a lollypop given to assuage the feelings of the salaried class. This will lead to savings of only additional Rs. 10,000 p.a. (< Rs. 1,000 per month).

Salaried class needs to be taxed in a similar manner in which self-employed professionals are taxed, that is all expenses should be allowed as deduction from income and only net income should be taxed. All exemptions should be done away with.

This could be contested by people who don't own a house or a car. Their tax liability would increase. So, one could have two methods, one based on actual expenses (like professionals) and the other based on current system with hike in allowances to adjust for inflation.

Employees should have choice which one they want to adopt for their taxation purposes. Is the government listening?

Views expressed by the author are personal.
Link Hindustan Times