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Anomalies in direct taxes
December, 31st 2010

The direct tax regime reflects an absence of distributive justice. The glaring iniquity is submerged in the grand design of the new Direct Taxes Code (DTC). It would be best if these anomalies are given attention in the Budget of 2011-12.

Standard Deduction for Salaried Employees: While rationalising the plethora of deductions, salaried employees have been short-changed. In the case of non-salaried incomes large deductions are allowed for expenditures in connection with their work. Salaried employees also incur expenditures. The Budget for 2011-12 should restore the standard deduction for salaried employees.

Proposed Withdrawal of Forms 15G and 15H: The withdrawal of Forms 15G and 15 H would be harsh for persons with low income and hence should be retained up to a stipulated amount as persons with low income have difficulty in obtaining a certificate from the tax authorities. Moreover, tax payers do not get refunds for many years. Hence, these forms should not be withdrawn. Income tax refunds up to a certain amount should be granted without scrutiny but there should be harsh penalties for false claims.

Basic Exemption Limit: The basic exemption limit of Rs 1,60,000 for individuals has to be juxtaposed with the per capita income of Rs 45,000; for a family of four the average family income would be Rs 1,80,000 and as such income tax is applicable on very low incomes. It would be more equitable to scrap the 80C deduction and raise the basic exemption level to say Rs 3,00,000 with appropriately higher exemptions for senior citizens and women.

It is unconscionable to penalise senior citizens for not saving. To the extent the authorities wish to continue the 80C type of deduction the basic exemption of Rs 240,000, should be raised by the extent of the 80C deduction. In such an event senior citizens should not be eligible for the 80C deduction even if they save under the specified schemes.

Savings are undertaken in the early years of life while savings are legitimately drawn down in later years. Again the Revised DTC proposes to withdraw the higher exemption limit for women under the age of 65 years. The government should be sensitive to gender issues.

Restoration of the Erstwhile 80L Deduction: It is unconscionable to withdraw the 80L deduction for interest on bank deposits and other debt instruments and then provide for a blanket exemption without any limit for income by way of dividends from companies and mutual funds.

If the government does not wish to withdraw the blanket exemption for income from dividend from companies and mutual funds, it would only be fair that income from bank deposits and debt instruments should also be provided a similar exemption.

A sensible approach would be to allow an overall limit for deduction for income from bank deposits, debt instruments and dividends from companies and mutual funds. The argument that dividends are taxed in the hands of companies is totally untenable. Separation of income tax and corporate tax is a basic principle of public finance as the individual and the corporate are distinct identities.

Income is income and should be taxed irrespective of the stream from which the income is generated. Rationalising of the unlimited dividend exemption is sheer political nonsense. The corporate sector in India must be the envy of corporate sectors in other countries for the way it has, in India, conned governments of different political hues.

Income of Charitable Trusts: The DTC proposes that charitable trusts would be taxed on the unspent portion of their income. If this is implemented, there is no way that trusts would be able to build up their corpus through internal generation.

Given the inexorable march of inflation, over time, trusts would become meaningless as their income would not grow. This sounds the death knell for charitable trusts.

The proposed measure is ostensibly because some charitable trusts misuse this vehicle for siphoning off funds. This is akin to the punitive action of killing all the population of a village as one person indulges in anti-social activities. This measure must be re-examined in the Budget for 2011-12 and the anxiety of trusts put to rest.

Inheritance and Gift Taxes: The absence of an inheritance tax in India is glaring as such a tax is imposed in most countries. Furthermore, although there is a gift tax, the unlimited gifts to immediate relatives makes the gift tax totally ineffective.

While the Budget for 2011-12 would not deal with this issue, the Finance Minister should announce the setting up of a High-Powered Committee to review the issue of inheritance tax and gift tax against the experience in major countries.

Warren Buffett has recently argued that people like him should be taxed more as they have had it better than they ever had. Will Indian corporate honchos please stand up and be counted?

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