Irrational laws hamper income growth

Taxing Matters

 The tax laws provide incentives to maximise income and wealth, keeping in view the concept of ability to pay.

 Unfortunately, in India such policies since past few years have been framed to penalise income growth by subjecting people who earn more to pay more tax in utter disregard of the policy of ability to pay, merely concentrating on the aim of earning some more tax revenue disregarding the pernicious effect of such policy on voluntary compliance and in the process incentivising taxpayers to conceal more than show to avoid higher incidence of tax.

 This view gets support from the following tax measures introduced in the Income Tax Act through various Finance Acts.

 It does not need any argument to prove that the salaried persons who are in high income brackets have to share higher responsibilities and have to incur more expenditure in the context of their employment in updating their knowledge by purchase of journals, books, in travelling, in attending refresher courses, in maintaining computers and access to Internet.

 But our tax policy makers think that higher the income, the lesser should be the expenses. They have provided for deduction of such expenses by way of standard deduction in the following way (up to the assessment year 2003-04):

 

 

Persons up to salary income of Rs 1.5 lakh are to get the standard deduction equal to one-third of income or Rs 30,000 whichever is less;

Those getting salary exceeding Rs 1.5 lakh but up to Rs 3 lakh were entitled to the standard deduction of Rs 25,000 (fixed);

Those getting income exceeding Rs 3 lakh, but not exceeding Rs 5 lakh could claim fixed standard deduction of Rs 20,000; and

Those getting more than Rs 5 lakh were not to get any allowance by way of standard deduction.

 Mercifully, the scheme has been varied with effect from April 1, 2004 on the following lines:

 

 

In the case of an assessee whose income from salary, before allowing a deduction under this clause,

 

 

does not exceed Rs 5 lakh, a deduction of a sum equal to 40 per cent of the salary or Rs 30,000, whichever is less;

exceeds Rs 5 lakh, a deduction of a sum of Rs 20,000;

 But the policy of lesser standard deduction to higher income taxpayers has been continued.

 Similar discrimination has been made in giving tax rebate under Section 88. The rebate worked out on qualifying amount under this section is to be allowed as under on income basis:

 

 

In case of an individual or a Hindu undivided family, whose gross income before giving effect to deductions under Chapter VIA, is Rs 1.50 lakh or less, 20 per cent of the aggregate. Provided that an individual shall been entitled to a deduction of an amount equal to 30 per cent of the aggregate of the sums referred to in sub-section (2) if his income under the head salaries:

 

 

does not exceed Rs 1 lakh during the previous year before allowing the deduction under Section 16; and

is not less than 90 per cent of his gross total income, as defined in sub-section (5) of Section 80B;

In the case of an individual or a Hindu undivided family, whose gross total income before giving effect to deductions under Chapter VIA, is more than Rs 1.5 lakh but does not exceed Rs 5 lakh, 15 per cent of the aggregate.

in the case of an individual or a Hindu undivided family, whose gross total income before giving effect to deductions under Chapter VIA, exceeds Rs 5 lakh, nil.

 The above mentioned discrimination by itself was unjustified. But it has been perpetuated by the finance minister through the Finance Act 2003 by providing that individuals/HUFs with incomes up to Rs 8.50 lakh will pay no surcharge, but those having income exceeding this limit will be subjected to surcharge at the rate of 10 per cent while corporations (artificial persons) are to pay surcharge at the rate of 2.5 per cent only.

 In the case of the newly-introduced LIC pension scheme, the post-tax returns of persons getting income exceeding Rs 1.5 lakh are to be less compared to those having incomes below Rs 1.5 lakh.

 The issue is whether all such decisions are based on rationality. The only ground to support such discrimination could be the principle of capacity to pay