The world over, income tax is payable on incomes remaining after deduction of expenses incurred in earning it. This was the policy followed in India also till the year 2005 when finance minister P Chidambaram, while presenting the budget for the year 2005-06, decided to tax salary income on gross basis withdrawing the meagre deduction for employment-related expenses in the form of standard deduction (SD) given to salaried employees. This too he did for wrong reasons and wrong advice based on surmises in the report of the taskforce headed by Dr Vijay Kelkar.
Dr Kelkar compared a salaried employee with a self-employed person and felt that since a self-employed person does not get SD, there is no ground for giving such deduction in the case of salaried assessees also, though in para 4.46 of the report, it is admitted that a self-employed taxpayer has greater opportunities to evade taxes by lumping their personal expenses with other expenses. Obviously, the comparison was inapt.
Dr Kelkar also accepted in the report that the SD, allowed against salaried income, is ostensibly to compensate, on an estimated basis, for the expenditure incidental to the employment of the taxpayer.
Yet, in the report, the suggestion for its discontinuance was given on the ground that once conveyance expenditure is separately exempt from taxation, it is difficult to visualize any other expenditure, other than personal in nature [para 4.49].
Nothing can be farther from truth. In the present day competitive employment environment, when rapid strides are taking place in science and technology and in various areas of high priority research, knowledge is to be updated constantly. When computers and websites have become a necessity to say that if an employee incurs expenses in keeping himself updated in the line he is working to continue in his job and even for making advancement, he incurs expenses of a personal nature, is to shut ones eyes from real life situation.
So the decision to withdraw SD on such recommendations is prima-facie wrong and unfair.
One more reason given by the taskforce for withdrawing SD is that it would meet revenue loss to the extent of Rs 4,000 crore. It is pity that the taskforce, instead of suggesting ways and means to augment revenue by tackling widespread tax evasion and avoidance, thought of meeting revenue loss by hurting the most disciplined taxpayers by suggesting withdrawal of the meagre deduction for expenses by way of SD. Discontinuance of SD on the basis of such reasoning is clearly unfair.
FM has given the following reasons in this regard based on the Kelkar report: Given the higher exemption limits and the scaling up of tax brackets, the need for separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction (para 153 of the budget speech).
Respectfully, prima-facie, the reasons given, affecting the salaried taxpayers, are superficial and far from reality.
Higher exemption limit and adjusted tax brackets are for the benefit of all categories of taxpayersnot merely for salaried employees. On this ground, salaried employees cannot be discriminated and denied deduction for employment-related expenses when all other assessees are entitled for such deductions without limits concerning income-generating activities to arrive at taxable income.
Further, by no stretch of imagination, SD can be said to be given for personal expenditure of the employees. The FM has failed to appreciate that personal expenses are only those, which are spent to satisfy the personal needs of a person, such as living, food, clothes, etc, for the purposenot related to business.
Also, till March 1974, expenses on books, journals, conveyance and those incurred wholly, necessarily and exclusively for the performance of duties, were admissible as deduction. For administrative convenience, these were replaced by a lumpsum deduction called SD. Hence, SD was obviously not given for personal expenses.
The ground regarding growing international practice is equally incorrect. The Kelkar report itself shows that SD was being allowed in Malaysia, Indonesia, Germany, UK, Japan, France & Thailand.
Apparently, there is no logic in discontinuing SD. Doing so is highly arbitrary and make such taxpayers, who even, according to the taskforces study, contribute about 35% of the personal tax revenues, disgruntled and demoralized.
Further, such unfair and ad hoc decisions bring down the credibility of the tax department in the eyes of a vast number of taxpayers, affecting voluntary compliance with very little revenue gain.
Hence, a decision regarding SD, taken on wrong premises and understandings, needs to be reversed by the Finance Bill, 2008. If a wrong has crept in, it needs to be corrected without making it a prestige issue.
(The author is former chairman, CBDT)
