THE budget presentation date having been preponed by one month to February 1, umpteen suggestions must be pouring in the Finance Ministry regarding changes that need to be made in the Income Tax Act.
I just wish to make one to highlight the injustice and discrimination practiced in the cases of the most honest sector of taxpayers-the salary earners-on whom injustice was thrust by P Chidambaram, the Finance Minister in the UPA Government, vide his budget proposals for the year 2005-06 when he increased exemption limits and adjusted the tax brackets. He made the salaried employees to bear the burden of these changes, in financial terms, by abolition of the Standard Deduction (SD), observing:-
“Given the higher exemption limit and scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with the growing international practice, I propose to remove the Standard Deduction”.
The SD stands abolished since April 1, 2006, for most untenable reasons given with a casualness which shall be mentioned later. Before that, the policy followed in the IT Act for taxing incomes in respect of various sources needs to be stated to expose the hollowness of the grounds stated by Chidambaram for abolishing deduction for salary earners relating to employment related expenses in the form of SD.
Under the IT Act, income to be assessed as such need to fall under any of the following heads:
– Salaries-Section 15.
– Income from house property-Section 22.
– Profits and gains of business or profession-Section 28.
– Capital gains-Section 45.
– Income from other sources-Section 56.
The policy in income taxation is that it is not to be taxed on gross basis, but is to be subjected to tax after deducting the expenses incurred in earning it. Thus, Section 24 mentions about deductions to be made in computing the taxable income from house property, Section 29 about expenses to be deducted in cases of income from business and profession, Section 48 about deductions from capital gains and Section 57 about such deductions from income from other sources.
But, presently, no deduction for earning salary is permissible in the Act except entertainment allowance received from the employer (up to Rs. 5,000) and professional tax; though up to March 31, 2016, SD for employment related expenses was allowed as deduction. By the Finance Act, 2001 (from April 1, 2002), SD at the following rates was admissible:
[i] In the cases of assessees up to income of Rs. 5 lakh, at the rate of 40 per cent or Rs. 20,000, whichever is lower.
[ii] Where income exceeded Rs. 5 lakh, a sum equal to Rs. 20,000.
Such deductions were permissible in case of salaried employees also vide Section 16 of the IT Act. The history of Section 16(1) providing for SD shows that it is in lieu of employment-related expenses like expenditure on books, conveyance, etc., on actual basis, which required checking of various expenses. Hence, to simplify the taxation of income from salaries with effect from April 1, 1993, the practice of allowing item-wise deduction was given up and practice of SD was introduced by the then Finance Minister.
Not giving any deduction for employment-related expenses on most untenable grounds was the most unkind gesture of Chidambaram for such taxpayers and making them to pay tax on gross incomes against the policy enshrined in the Act. The deduction on account of expenses was given on a standard basis to avoid controversies during assessments and streamline the functioning. There is no dispute that such expenses were deducted in cases of salary earners for their expenses relating to their employment. The only deduction now permissible is payment for professional tax levied by some State governments.
In the background of what has been stated earlier, the issue for consideration is whether there are any grounds to discriminate the salaried employees vis-à-vis other taxpayers in getting deduction for employment-related expenses in their income tax assessments. This issue is being examined under two heads-whether the reasons given by Chidambaram justify non-deduction and whether on merits the expenses need to be decided.
An examination of the reasons given by Chidambaram for scrapping SD will convince anybody that the decision was based on totally untenable grounds. These are:
– SD was not given as a ‘personal allowance’, but in lieu of employment-related expenses. Personal expenses are those that relate to the person of the taxpayer on his food, clothing, education, etc., not for expenses which relate to his employment.
– Higher exemption limit and readjustment of tax brackets benefitted all categories of taxpayers, not merely the salary assessees. To punish such taxpayers by higher taxes by abolishing SD was misconceived, discriminatory and unfair.
– SD is still continuing in a large number of countries.
ON merits also, there is no ground for not giving deduction for employment-related expenses. SD for employment-related expenses is more relevant today than in the past because today’s employees have to spend large amounts on computers, pen drives, printers, internet, making CDs for presentations, books, journals, training, travelling, etc.-not only for promotion but also for staying in the job because of stiff competition. The government does not provide such avenues free of cost for keeping one updated and efficient in carrying on the employment related work and discharging the obligations related thereto efficiently. If not so done, not only there can be lagging behind in discharge of expected work, but there could be loss of employment also. Expenses of the nature specified earlier cannot be considered as of personal nature and not related to employment as mentioned by Chidambaram.
The decision of the former Finance Minister was, obviously, of a bizarre and casual nature and needs to be corrected by the present Finance Minister. Actually, correction should have been done immediately after coming into power of the new government. But, better late than never!
The SD needs to be brought back by the Finance Act, 2016, to undo the injustice and discrimination being perpetuated since 2005-06 on wrong understanding of the factual position. The suggestions, keeping in view the present economic situation, are:
– Where the salary income is up to Rs. 10 lakh, 40 per cent of the total income or Rs. 40,000, whichever is lower.
– Where income exceeds Rs. 10 lakh, a sum equal to Rs. 40,000.
The writer is former Chairman, CBDT