The standard deduction provision should be applicable to salaried individuals who indirectly incur expenditure for earning income
Income tax can be a very iniquitous method of raising revenue if the tax provisions result in unfair and unequal treatment of different individuals in similar economic circumstances. Yet, the existing income tax structure is riddled with anomalies which make the system unfair. It taxes far more than proportionately the income of salaried persons. The burden of income tax on such employees is much more, compared to other categories of taxpayers.
Those who framed our income tax laws provided certain provisions specifically for salaried persons with the intention of giving them just and equal tax treatment. One such provision was made under Section 16 (1) of the Income Tax Act, 1961, and was popularly known as standard deduction. Unfortunately, the standard deduction provision was withdrawn by the Finance Minister in 2005.
Its abolition placed salaried persons in a disadvantageous position as compared to businessmen and professionals as the latter are entitled to claim deduction of expenditure incurred for earning their income while salaried persons are not.
According to the income tax laws, any cost incurred for earning the income is subtracted from the aggregate gross income and tax is assessed on the remaining portion of income. Following this principle, the expenditure of an individual in the course of the income-earning activity is also sought to be deducted from his income.
In the case of businessmen and professionals, there is hardly any problem in identifying expenditure which can be regarded as incidental to their business or profession. The problem arises in the case of salaried persons, since the expenditure incurred in the course of execution of duty is indirect. An empirical study of the income tax laws reveals that certain expenses of salaried persons were identified as being incurred in the course of earning the salary. Up to 1974, when the Standard Deduction was introduced, salaried persons were also entitled to claim deduction of expenditure incurred for earning salary. These expenses included expenditure on books and other publications, on conveyance and any other similar expenditure.
The conveyance deduction was granted for the first time by the Finance Act, 1968. The rate of deduction was Rs 150-250 per month for scooter or motorcycle and Rs 5 for bicycle. The Finance Act, 1969 fixed the standard deduction for car at Rs 200 per month. The standard deduction for scooter was raised to Rs 60 per month by the Finance Act, 1970. A deduction of Rs 35 per month was also prescribed for those who did not own any conveyance and used public transport. For the assessment year 1972-73, conveyance deduction at the rate of Rs 200 per month for car, Rs 75 for motorcycle or scooter and Rs 50 in every other case was provided.
Separate deduction for expenses actually incurred by employees wholly, necessarily and exclusively in performance of duties and which were not covered under the above mentioned provisions was also provided. But the deductions for books and publications, conveyance and the like were allowed at a fixed rate and the actual expenditure incurred on these activities was not deductible.
To simplify the assessment procedure for salaried taxpayers, it was decided that, in lieu of all these deductions, a fixed proportion of the salary may be deducted for the expenditures incurred for earning the salary. The Finance Act, 1974 substituted the above separate deductions with a fixed “standard deduction” at the rate of 20 per cent of the salary up to Rs 10,000 and 10 per cent of the salary in excess thereof, subject to a maximum deduction of Rs 3,500.
The percentage of salary for standard deduction and its maximum ceiling was changed from time to time. The abolition of standard deduction places the salaried persons in a disadvantageous position in comparison to businessmen and professionals. Suppose a salaried person’s gross salary amounts to Rs 3,80,000 and a businessman also has the same gross income. They purchase cars, costing Rs 4,00,000 each and financed by bank loans. During the previous year they spent Rs 24,000 each on petrol and maintenance, and pay Rs 46,000 each as loan interest.
While computing the tax liability as shown in the table, the businessman claims a deduction of Rs 24,000 for expenditure on petrol and so on, Rs 46,000 for interest paid on loan taken for purchase of the car and Rs 60,000 for depreciation on the car. After investing Rs 1,00,000 under Section 80C of the Income Tax Act, his taxable income is reduced to zero. But the poor salaried person is not allowed any deduction relating to the car and is liable to pay Rs 21,420 as income tax.
The standard deduction was not a rebate or an incentive given to a salaried person. It was given in lieu of expenditure incurred for earning the salary. Therefore, it was a right and its existence should not depend on the mercy of the Union Finance Minister. The standard deduction was introduced by withdrawing all the other deductions of expenditure incidental to service, for the convenience of the tax collection machinery.
Thus, the abolition of standard deduction is arbitrary, discriminatory and inconsistent with the objective for which the provision was introduced.
(The writer is Registrar of Companies, Punjab, HP and Chandigarh. The views expressed are personal.)
The standard deduction was not a rebate or an incentive given to a salaried person. It was given in lieu of expenditure incurred for earning the salary. Therefore, it was a right and its existence should not depend on the mercy of the Union Finance Minister
Comparison in the tax liability of salaried person and businessman with equal gross income
| Salaried Person | Businessman / Professional | ||
|---|---|---|---|
| Gross Salary | Rs 3,80,000 | Gross Income | Rs 3,80,000 |
| Less: | |||
| (1) Expenditure on Petrol & maintenance of car | Rs 24,000 | ||
| (2) Interest on car loan | Rs 46,000 | ||
| (3) Depreciation on car | Rs 60,000 | ||
| Taxable Income | Rs 3,80,000 | Total Expenses | Rs 1,30,000 |
| Taxable Income | Rs 2,50,000 | ||
| Less: Deduction u/s 80C | Rs 1,00,000 | Less: Deduction u/s 80C | Rs 1,00,000 |
| Tax Liability | Rs 21,420 | Tax Liability | NIL |
* Assessment Year 2008-09
