On February 26, when the Honourable Finance Minister presents the Union Budget, he will have to balance the expectations of multiple stakeholders.
From a macroeconomic perspective, 2009 has been a difficult year. The global slowdown impacted Indian businesses in a big way. One of the consequences of the slow-down has been that most companies have resorted to cost cuttings with special attention to reducing employee related costs. From the employees' perspective, reduced bonuses and increments, combined with increase in costs of most essential items due to inflation has caused a hole in their pockets. Salaried persons would be expecting some respite and would be hoping that the Finance Minister proposes measures in the Budget to bring some relief by way of tax concessions for the salaried class.
Tax concessions would result in creating disposable income for the huge salaried class, thereby stimulating demand in the economy. The huge budget deficit has put pressure on the Finance Minister to find the right mix of tax enhancing policies and fiscal stimulus. With a fragile economic recovery underway, the Government has to balance its intention to boost purchasing power with need to reduce the fiscal stimulus and balance its books. These conflicting objectives will be at the centre of the Union Budget 2010.
Historically there is enough empirical data to suggest that tax cuts lead to generation of higher revenues for the Government with increased tax compliance. In fact, a report on Direct taxes, submitted by the Task Force headed by Dr. Kelkar in December 2002, noted that there was a direct correlation between increase in exemption limit and rise in tax compliance in India.
Some recommendations that could ease the income tax burden on individuals, and improve the economic growth rate on account of increased domestic demand are mentioned below:
Raise the bar: The slab of tax free income has not moved up in line with the real inflation. The current basic exemption limit of Rs 1,60,000 should be increased to Rs 3,00,000. This will increase the purchasing power of individuals and stimulate demand.
Reduce the maximum tax rate: Last year, removing the surcharge only benefited the higher income group and there was no respite for the lower income group. So, this year lower and middle income group can be benefitted by reducing the peak rate from current 30% to 25%. Further, the peak rate should be attracted at significantly higher income slab (as compared to current limit of Rs 5,00,000). Though this aspect has been recognised in the proposed Direct Tax Code (DTC), the same also needs to be considered in the forthcoming budget.
Increase the investment limit under Section 80Cof I-T Act: Though , the avenues for investment under Section 80C have been increased with the years, the limit of Rs 100,000 has remained the same. The Government should increase the aggregate deductible limit under Section 80C of I-T Act from Rs 1,00,000 to Rs 2,50,000. This will encourage long term savings by tax payers and also enhance availability of low cost funds for the Government to meet its long term development needs.
Additional benefits related to housing: Currently, an individual is permitted deduction for interest on loan for a self-occupied property up to Rs 1,50,000. This limit has not been revised for a long time, while property prices have increased manifold. The Government should consider increasing this limit to Rs 3,00,000 or alternatively, this cap may be scrapped.
Also the deduction available under Section 80C of I-T Act on repayment of principal amount of housing loan should be appropriately increased. This would not only encourage investment in the real estate sector but will also make buying a house relatively affordable.
Medical expense reimbursements: Medical expenses of up to Rs 15,000 reimbursed by the employer to the employees for medical treatment of employees or his family member are tax-free. Accordingly, employee ends up paying tax on any sum reimbursed over and above Rs 15,000. With increasing healthcare costs, the existing tax free limit of Rs 15,000 should be suitably increased.
Transportation expenses: The transportation allowance granted by the employer to his employee for commuting between the place of work and residence is tax-free to the extent of Rs 800 per month. This limit was fixed more than a decade ago, and definitely needs to be revised upwards given the rising commuting costs across the country.
Tax relief on contribution to superannuation fund in excess of Rs 1,00,000: Currently employers contribution to superannuation fund in excess of Rs 1,00,000 is taxed in employees hands. Employees should not be made liable to pay tax on such contribution the benefit of which may or may not arise and the benefit is subjected to tax at the time of actual receipt.
The Honorable Finance Minister has the tough task of boosting purchasing power in the hands of the common man, while ensuring mobilisation of adequate resources to meet the developmental and social reforms agenda of the Government. One hopes that he will recognise the benefits of the above recommendations in meeting both these objectives.