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Budget 2008: What all should the government do at the Personal Tax front?
February, 09th 2008
So, what should Budget 2008 be like and what are the aspects that deserve the finance minister's attention? We will bring to you a series of insightful articles in association with Ernst & Young in the run up to the budget. We will follow this up with post-budget analysis from Ernst & Young and revisit each of these areas after the budget to see what has been achieved. We will also bring special analysis on all major developments in the budget.

This first in the series from E&Y on how it looks at an issue so important to all of us - Personal Taxation.
Vishal Malhotra, Tax Partner, E&Y
Budget 2008: Great expectations!

Can Individual tax payers be optimistic about the proposals in the Finance Bill, which will be tabled on February 29? The economy is on an up-swing and there are several factors which can act as catalysts in turning their expectations into a reality.

Direct tax collections are at an all time high and for the first time, the collections have surpassed the indirect tax collections, one of the factors being better compliance. It is also pertinent to note that though the overall direct tax collections have gone up by about 42 per cent as compared to last year, the biggest growth has come from the personal income tax segment that has grown by more than 50 per cent. This is almost a perfect setting for the Government, which would also be mindful of the Lok Sabha elections due early next year, to further rationalize the tax structure and simplify processes affecting the individual tax payer.

A few of the expectations that we the people have from the forthcoming budget have been listed below:

Increase in basic exemption limit

An enhancement in the basic exemption limit to at least Rs 150,000, and corresponding changes in the limits applicable for women and senior citizens, are the first and foremost expectations from the budget. The present basic exemption limit of Rs 110,000 does not compare with the levels existing in other developing economies. Even, taking into account the inflation rate as admitted by the Government itself, raising the limit by

Rs 10,000 would be the bare minimum expectation though a realistic level would be The Rs 150,000 which would at least bring a small smile on the face of the common man.

Rationalization of slab rates

A corresponding change in the slab rates, which have remained constant for the last 3 years, is also a reasonable and justified expectation. The following slab rates are certainly something which the Government can seriously give a thought to:

Suggested slab rates:
Basic Rate
Up to 150,000
150,001 to 200,000
200,001 to 300,000
300,001 and above

Current slabs:

Basic Rate
Up to 110,000
110,001 to 150,000
150,001 to 250,000
250,001 and above

The above change is not likely to adversely effect the overall collections of the Government, but would result in a perceptible relief to the huge middle class population in the country which has been a significant contributor to the growth of the Indian economy over the past few years.

The marginal decrease in the personal income-tax collections, if any, would be more than offset by the corresponding increased collections in indirect taxes and corporate taxes given that the resulting increased purchasing power in the hands of the common man will only give a thrust to the manufacturing sector.

Increase in deduction available under section 80C

Another big expectation from the budget is an increase in the deduction available under section 80C of the Income-tax Act. Presently, an amount of Rs 1,00,000 is allowable as a deduction from the taxable income if the same is invested in the prescribed savings instruments, paid as life insurance premia, and/ or incurred for prescribed purposes.

Since last year, organizations such as LIC have been voicing concern over the decline in attractiveness of long term investments prescribed under section 80C and have been demanding a separate bucket of deduction for long term savings instruments.

The demand seems to be justified since the younger generation is generally averse in investing in long term schemes. Even the classical savings instruments such as Employee Provident Fund, PPF etc. are not opted by many of the youngsters. Accordingly, providing a separate bucket of investment for the long term saving instruments viz. life insurance and pension plans would not only prove to be a blessing for the younger generation but will also generate long-term funds for the economy.

A separate limit under section 80C of Rs 20,000, reserved only for long term saving instruments, over the existing limit should be a good starting point.

Rationalization of levy of surcharge on individuals

Presently, an individual is liable to pay an additional surcharge of 10 percent if the individual's income exceeds Rs 1,000,000. This is in sharp contrast to the corporates where surcharge is applicable only if the income is more than Rs 1 crore. It is being increasingly felt that to meet the objective of progressive system of taxation and in the interest of equity, the levy of surcharge in case of individuals should also be only in cases where their income exceeds Rs 1 crore.

Justification for levy of surcharge, in any case, needs to be looked upon afresh by the Government given that surcharge had been brought in as an interim measure to augment collections during times when the country was faced with natural calamities and other adversities. The buoyant tax collections in the present year should give enough reasons to the Government to at least reduce the surcharge if not completely do away with it.

Better tax payer services

E-filing of income-tax returns, online PAN application etc. have been steps taken in the right direction and one hopes that more such measures are implemented to enhance tax payers convenience.

One of the biggest grudges that the tax payer has is the delay or even non-receipt of valid refunds. There have been certain improvements in the process over the last year but a lot still needs to be done to address this grievance.

The refund mechanism in place does not compare favorably with those in developed countries where obtaining refund is a smooth, time-bound process. The Government needs to clearly bring around radical changes in the mechanism.

A due date for granting refunds as is there for filing returns and paying taxes, and fixing accountability for delays would make the mechanism more robust and would also effectively curb the menace of corruption that has crept into this important function undertaken by the tax authorities.

The initiative taken by the tax department in Mumbai to list down the undelivered income tax refunds of all salaried tax payers on its website is a welcome move towards transparency and such a step can indeed become a beginning of a revolution that is so desperately needed on this front.

An efficient refund mechanism will go a long way in instilling confidence among the tax payers and will invariably lead to much better compliance and higher collection.

The above wish list is a deserved and realistic expectation and it is an excellent opportunity for the Government to drive in the 'feel good factor' amongst the masses by taking a considerate view on these. Till such time, hope for the best!
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