IN the budget speech, the Finance Minister, in para 151, under the caption ‘relief to salaried taxpayers’, has accepted the contribution of such persons to the income-tax revenues of the country saying: “There is a general perception in the society that individual business persons have better income as compared to salaried class. However, income-tax data analysis suggests that major portion of personal income-tax collection comes from the salaried class. For AY 2016-17, 1.89 crore salaried individuals have filed their returns and have paid total tax of Rs. 1.44 lakh crore, which works out to average tax payment of Rs. 76,306 per individual salaried taxpayer. As against this, 1.88 crore individual business taxpayers, including professionals, who filed their returns for the same AY, paid total tax of Rs. 48,000 crore, which works out to an average tax payment of Rs. 25,753 per individual business taxpayer”.
After accepting the solid contribution of such taxpayers, who pay taxes honestly—more than businessmen and professionals—he made this declaration as a gesture of appreciation: “In order to provide relief to salaried taxpayers, I propose to allow a standard deduction of Rs. 40,000 in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses. However, the transport allowance at enhanced rate shall continue to be available to differently abled persons”.
Appraisal of the proposal
Against the Standard Deduction (SD) of Rs. 40,000, the following reliefs, already being availed of, stand withdrawn:
- Transport allowance : Rs. 19,200 [@ Rs.1,600 per month]
- Medical expenses reimbursement : Rs. 15,000 Total Rs. 34,200
The SD amount that remains after such deductions is Rs. 5,800 per annum only, which translates to a total tax saving of Rs.1,810 on tax payable in the highest slab (@30% + 4% cess tax). On lower slabs, the tax saving would be marginal—for 2.5 lakh to 5 lakh slab, Rs. 301.60; for Rs. 5 lakh to Rs. 10 lakh slab, Rs. 1,206.04. These savings in tax get further reduced by 1 per cent extra cess and hence, there seems to be no basis for Finance Minister highlighting this in his budget speech and claiming that he has given SD of Rs. 40,000 to salaried taxpayers.
Rationale for SD ignored while making announcement
The Finance Minister, it seems, has forgotten to take notice of the rationale behind SD. While making the announcement that it is to be given in lieu of ‘employment-related expenses’ incurred by an employee, he has ignored the fact that tax under the Income Tax Act is levied on net income—not on gross receipts. Income under the IT Act is to be taxed under five heads:
- house properties
- business and profession
- other sources
- capital gains
Income from business and profession is taxed u/s 28 of the Act on residue left after deducting the expenses incurred for earning it. Section 29 of the Act provides that ‘income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D of the Act’. These sections deal with various expenses deductible from total income—rent, rates, taxes, repairs and insurance for buildings (Section 30), repairs and insurance of machinery, plant and furniture (Section 31), depreciation (Section 32) and so on. U/s 37(1) of the Act, titled ‘general expenses’ on conveyance, including on petrol, driver’s salary, depreciation, interest on loan taken for purchase of vehicles, etc., can be claimed by businessmen and professionals without any limit, provided it is reasonable.
Sections 22 to 27, dealing with income from house properties, provide vide Section 24 that from the Annual Value (AV) of a property, the following deductions are permissible:
- A sum equal to 30 per cent of ALV
- Interest on borrowed capital taken in the context of acquiring, constructing, repairing, renewing a property.
From incomes assessable under the head ‘other sources’ u/s 56, Section 57, gives a list of expenses which are deductible for arriving at the taxable amount. After mentioning some specific expenses, the section provides a general clause for deduction, saying that any other expenditure (except capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income, shall be deductible.
Capital gains are taxable u/s 45. Section 48 states about the expenses that can be deducted in arriving at the taxable figure.
Thus, income from ‘salaries’ is the only section where receipts are taxable on ‘gross’ basis. Such discrimination is perpetuated since AY 2005-06 when P Chidambaram was the Finance Minister. In fact, SD was conceived of as a simpler way to allow salary earners employment-related expenses, which were of varied nature, like on books, travel, training, etc.
DURING the period the books were checked by the AOs, their checking involved strenuous work with little revenue impact. Hence, it was decided that an adhoc amount, called SD, will be deductible on graduated basis with maximum fixed for various income slabs u/s 16(1) of the Act. The scheme was working well, but suddenly on untenable grounds, Chidambaram withdrew it and from the AY 2005-06 salaries are being taxed on gross basis without allowance of any expenditure relating to employment.
The present Finance Minister in his previous budgets never looked at this problem and when, in the last full budget of the NDA Government, he thought of it, he has provided for it in the most unsatisfactory way, even without appreciating what expenses need to be covered by it.
It is undisputed that an employee has to incur considerable expenditure on books, journals, computers, laptops, websites, internets, travels, training, etc., in present times to continue in the employment. When businessmen and professionals can claim deduction for such expenses, there does not seem to be any ground why salary earners should be denied such deduction; and when given, it should be nullified by adjusting against it expenditure which is allowed to other taxpayers, like expenses on conveyance and on health insurance premium (which is proposed to be raised from the present Rs. 30,000 to Rs. 50,000). Such discrimination in the context of income from salary is wholly unfair and unjustified.
It is sad to see that the present Finance Minister perpetuated the injustice meted to salary earners by his predecessor—Chidambaram—for four years in his tenure. And when he felt the need for allowing SD to salaried taxpayers, he did it by giving by one hand and taking it back from another. Hence, my suggestion is that an amendment be moved to set right the injustice to 1.89 crore honest taxpayers, whose contribution to the tax kitty of the country per head is much more than businessmen and professionals, according to the Finance Minister’s own figures. The amount of deductible SD should be worked out on a graduated basis, more in the cases of higher groups and less in the cases of lesser income groups, with a cap of maximum amount, and not an adhoc figure in all cases as the quantum of expenditure will differ in such cases.
The writer is former Chairman, CBDT
VOL. 11 | ISSUE 11-12 | MARCH 2018