T N Pandey: Free I-T of obsolete rules

TAXING MATTERS

Finance Minister P Chidambaram will present the Budget for 2004-05 on July 8. By now almost all proposals must have been finalised.

The country is now in the realm of guessing what is stored for it in the Budget. Here is an estimation of some of the possible proposals, concerning direct taxes, keeping in view the rational approach.

Simplification of tax laws
Some steps are expected to be announced for simplifying the tax laws, especially the Income Tax Act. Considerable reluctance to comply with the tax laws arises because the Income Tax Act is too lengthy, cumbersome to read, full of complications and continues with obsolete and irrelevant provisions.

Number-wise, the law has 298 sections. But if the actual number of sections are counted, these are more than 550. In some sections""80 HHA, 80 HHBA, 80HHF, 80JJAA, 115BBB, 276 CCC"" three-four English alphabets have been used for numbering them.

There are umpteen examples of such sections. The Act has become highly complex, heterogeneous, difficult to understand for taxpayers and also for the tax administrators. Hence, there is aneed for simplification and rationalisation of tax laws.

Obviously, this cannot be done through the Finance Act, 2004. A detailed study in this regard is called for. What the finance minister can do is to announce constitution of a full-fledged taxation commission headed by a Supreme Court judge to look into the complexities with a view to make them cohesive, simple, easy to understand; and to make their compliance easy.

Removal of aberrations
Successive finance ministers have brought in aberrations in the Income Tax Act, which one can hope would be set right this time. Some examples of are:

Lesser standard deduction for salaried employees with higher incomes: Jaswant Singh was considerate enough to permit person with salary income exceeding Rs 5 lakh to claim standard deduction of Rs 20,000 from April 1, 2004. Earlier, people with salary income exceeding Rs 5 lakh were not allowed any allowance by way of standard deduction.

Standard deduction is not allowed as gratuitous allowance or by way of charity to salaried employees. This is in lieu of expenses that they are required to incur in the context of their employment""mostly on books and journals and training to keep them updated for efficiently discharging their duties.

Such deductions, in the form of consolidated amounts, are of the same nature as businessmen and professionals are permitted in terms of Sections 30 to 43 D of the Act, in most cases without any limits.

It needs to be appreciated that the higher the position of responsibility an employee holds the complex are the challenges that he has to meet and for which he has to keep himself ready by reading literature and undergoing training. Hence, there is no justification of allowing lower standard deduction to people drawing higher salaries.

No rebate under Section 88 to people with income exceeding Rs 5 lakh: This is, prima facie, unjustified. If it is based on ability to pay then it is discriminatory in the sense that thousands of farmers are having substantial incomes and wealth and they have tremendous ability to pay taxes, but are not paying any tax by way of the income tax and the wealth tax.

Rather they receive substantial subsidies from the funds that other taxpayers contribute to the exchequer. Hence, there is no justification for denying the benefit of Section 88 to people having incomes exceeding Rs 5 lakh.

Higher surcharge at the rate of 10 per cent for people having income exceeding Rs 8.50 lakh: This is unfair and taxes efficiency at higher rate vis-à-vis inefficiency. There is no ground for subjecting higher-earned income of individuals to a surcharge of 10 per cent, when income of artificial judicial personal like firms are subjected to 2.5 per cent surcharge only.

Uniformity in age for getting Sections 88B benefit: It is nice that taxpayers, who have crossed certain age, have been given tax sops in the absence of a social security plan. But the age of 65, set for availing the tax benefit, which seems to have been adopted from the US tax laws, is on the high side. When a person retires at 60, there is no justification for fixing the age for tax benefit at 65.

Also there are different age limits for getting benefits under various schemes. For example, the LIC Varishta Bima Yojana, offering 9 per cent annual return, is available for those aged 55 and above.

Similarly, the railways provide the concession to citizens who are over 60. The Indian Airlines give concession in fare to those who are aged 65 and above. The contemplated Dada Dadi Bonds proposed by the former finance minister has set the age at 60 for investors.

There are other examples also of varying ages. Hence, uniformity in this regard is essential and it is expected that for getting the benefit provided under Section 88B of the Act the age could be lowered to 60 from 65.

Checking black money
The common minimum programme of the UPA postulates a scheme for curbing black money. Hence, proposals are expected to have some provisions.

It could be hoped that the Budget would announce a realistic approach in this direction and there would be nothing like an amnesty scheme (on the lines of the VDIS announced by Chidambaram earlier). Such schemes are demoralising for the honest taxpayers and also bring down the government's credibility.

Taxing rural rich
To bring equity in the tax system, at least rural rich should be subjected to the wealth tax.

Reversing the amendment concerning resident and not ordinarily resident brought in last year: The definition of "not ordinarily resident" as contained in the Income Tax Act, 1961, before its amendment by the Finance Act, 2003, needs to be brought back to ensure that there is even flow of foreign exchange in the country through non-residents.

The amendment made last year on the basis of a Gujarat High Court decision in the Pradeep J Mehta vs Commissioner of Income Tax case, 256 ITYR 647 (Gujarat), was prima facie made in a haste without appreciating the pros and cons of the change.