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No strong case for credit
May, 19th 2007
Section 88, which was equitable and working well, should have been continued. Section 80C favours the higher-income-group taxpayers.

The Budget exercise is complete, with the Finance Minister's reply to the debate in the Lok Sabha and the passing of the Bill. But many aspects of the `success story' with regard to Direct Taxes do not carry conviction.

Tax-GDP ratio

It has been said that this ratio was 9.2 per cent in 2003-04 the last year of the NDA Government and rose to 11.5 per cent in 2006-07. Obviously, in an expanding economy, this is bound to happen.

The GDP also grew yearly when the NDA Government was in power. Tax collections have risen year to year. Hence, while the growth cited is welcome, there does not seem to be any case for special credit for the same.

Tax brackets

Increasing basic income-tax exemption limits on an ad hoc basis to counter inflation in the absence of any scheme of indexation has been common practice for the past many years and the UPA Government has been no exception. Further, to say that for salaried employees, the limit was Rs 80,000 (Rs 50,000 for all taxpayers and Rs 30,000 deduction for salaried taxpayers by way of Standard Deduction, or SD, for `employment-related expenses') is distortion of facts.

On the basis of this theory, in the case of other taxpayers too, the expenditure allowable for business/profession-related expenses would need to be added back to arrive at the basic exemption limit and this would work out to a much higher figure.

The Finance Minister is making a virtue of withdrawing SD on a wrong premise, treating it as "personal expenditure". The mistake made two years ago is being projected as an achievement in recasting the tax brackets.

It is claimed that all taxpayers benefited under the recasting of tax brackets.

In the case of senior citizens, getting a tax rebate of Rs 20,000 in the NDA regime, the tax benefit was reduced to Rs 13,000 by last year's Finance Act. It is Rs 14,000 for 2007-08 by increase of exemption limit by Rs 10,000 for all taxpayers by the Finance Act, 2007.

The benefit of Rs 2,000, by this increase would, however, get reduced by the extra levy of 1 per cent education cess. Obviously, all taxpayers cannot be said to have benefited. Senior citizens have been hit hard.

Transport allowance for salaried employees

The transport allowance of Rs 9,600 per annum is no bonanza for employees when other taxpayers can claim transport expenses of any magnitude incurred wholly and exclusively for earning incomes.

Tax treatment of savings

It has been said: "As against the earlier method of giving tax rebate, which often resulted in the full benefit not accruing to the taxpayer, we have introduced section 80C. Now, the treatment is not by giving a tax rebate, but by giving a deduction from income so that the full benefit accrues to the taxpayer. Thus, every taxpayer, in addition to the benefit of the revised tax bracket, could also enjoy a full deduction from income up to Rs 1,00,000 u/s 80C."

It could be said that the statement is ambiguous and misleading. No reasons have been given as to why under the earlier scheme full benefit could not be secured by a taxpayer when there were no specific restraints. Further, Section 80C is no innovation. It was there till 1989 and was omitted by the Finance Act, 1990 for the following reasons:

"Under the existing scheme of Section 80C, a person gets tax relief at the highest marginal rate of tax applicable to him.

Accordingly, it confers higher amount of tax benefits to a person with higher income vis--vis person with lower income. The scheme is, therefore, `regressive and inequitable'". No credit can be claimed for bringing back such a provision.

Section 88, which was equitable and was working well, should have been continued. Section 80C favours the higher-income-group taxpayers.

Increase in exemption limit by Rs 10,000

It is illusory in view of galloping inflation. Further, it would be taken away by the 1 per cent extra education cess and the benefit would cease after the income reaches certain levels.


It has been said that "worldwide ESOPs are subject to tax". The statement is ambiguous. Worldwide ESOPs are subjected to tax as perks - not as fringe benefits.

According to the FM's scheme, FBT on ESOPs would be payable by the employers, which can be passed on to the employees. With this, the burden on the employees would be high i.e. equal to 33.99per cent.

However, if employees were to pay tax on these as perks, the burden would be much less either as tax on income or on capital gains.

Telling figures

The hollowness of income-tax policies can be seen from the admission of the FM that in 2005-06, the number of taxpayers in the country with income of Rs 10 lakh or more was only 1,40,000.

The number of affluent individuals in Maharashtra has been estimated at 2,00,000. Will it not be worthwhile for the FM to focus on such persons and increase revenue rather than claim credit for the not-so-significant aspects mentioned in reply to the debate on the Budget?

T.N. Pandey
(The author is a former Chairman of CBDT.)

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