T. C. A. Ramanujam

T. C. A. Ramanujam on why the salaried should not have been denied the benefit of standard deduction

ALL along, the salaried taxpayer had to be content with standard deduction, with no special treatment either by way of tax rate concessions or by way of rebates and relief. In the latest Budget, even this has been done away with. In Para 153 of the Budget speech, the Finance Minister observed: "Given the higher exemption limit 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".

Under the existing provisions of Section 16 of the Income-Tax Act, 1961, an assessee whose income from salary does not exceed Rs 5 lakh is allowed a deduction of 40 per cent of salary or Rs 30,000, whichever is less. In the case of an assessee whose salary income exceeds Rs 5 lakh, a deduction of Rs 20,000 is allowed. It is explained that because of the increase in the general exemption limit to Rs 1 lakh and the substantial broadening of the income slabs, this benefit of standard deduction is being withdrawn with effect from April 1, 2006.

This means that from the next financial year onwards, the salaried taxpayer will have to compute income-tax on total income like any other taxpayer without the benefit of standard deduction.

It was the Kelkar Task Force that had a hard look at this deduction. It pointed out that in addition to the standard deduction, salaried employees are also eligible for a deduction up to a maximum of Rs 9,600 towards conveyance allowance received from their employer. The standard deduction allowed against salaried income is meant to compensate, on an estimated basis, for the expenditure incidental to the employment of the taxpayer.

According to the Kelkar report, a large number of perquisites, which are available to salaried employee is either concessionally treated or fully exempt, thereby substantially reducing the effective tax burden on a salaried employee. In the case of a self-employed, all such benefits have to be paid for out of the post-tax income.

The Kelkar panel did not visualise any employment-related expenditure, barring conveyance. Most employers provide for books and periodicals.

The Shome Committee had also recommended omission of standard deduction.

The Kelkar panel examined the system in other countries and found that no deduction is allowed for employee-related expenses in Bangladesh, Singapore, Italy, New Zealand, Sri-Lanka, the Philippines, the Netherlands, Argentina, Peru, Australia, the US and Canada. The UK allows actuals and France allows a maximum of euro 12,229. Thailand allows 40 per cent subject to a limit of baht 60,000. Germany allows a lump sum of euro 1044 and Indonesia a limit of 1,296 rupiah.

The Kelkar Committee considered this a tax subsidy, which is both iniquitous and inefficient.

It is well known that salary earners suffer tax deduction at source and they have no choice of manipulating the incomes. They contribute about 35 per cent of the personal tax revenues to the government. According to one estimate, in the case of professionals, about 40 per cent of the gross receipts are generally considered expenses relatable to the earning of income. For salaried taxpayers with incomes above Rs 5 lakh, conveyance expenses may not pinch. For those in the lower income, many of whom have to travel long distances to the workplace, the sum of Rs 800 a month is meagre. The Kelkar panel had observed:

"It is not uncommon among salaried employees both in the private and public sectors to evade taxes (like self-employed taxpayers) on their illegitimate incomes through rent seeking and voucher payments."

Can this be ever an argument against denying standard deductions? What have vigilance organisations if they cannot detect illegitimate incomes through rent seeking? And are such illegitimate incomes taxable at all?

Much is made of the enhancement of the basic exemption limit and the upward revision of the tax slabs.

It may be worth recalling that entry levels for applying tax slabs are substantially higher in countries such as Pakistan, Brazil, the US and the UK. The upward revision of the exemption limit of Rs 50,000, fixed in 1998-99 and unchanged for seven years, was long overdue.

Property earners get a deduction of 30 per cent of the annual value. Professionals and businessmen get all types of deduction apart from the omnibus allowance of expenses incurred wholly and exclusively for the purpose of business. Incomes under `other sources' also get deduction for expenses.

The Schedular of system taxation is inequitable. The denial of standard deduction to the salaried clause amounts to treating the gross receipt as net receipt for employees of all categories.

It goes against the concept of vertical and horizontal equity. Standard deduction should not be denied to the salaried class.

(The author is a former Chief Commissioner of Income-tax.)

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