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Income Tax Benefits Should Be Adjusted to Inflation
June, 25th 2014

India's Union Budget 2014-15 is just a few days away and every taxpayer has his/her own wish list on what can be expected from it. In addition to the corporate sector, salaried taxpayers and middle class people of the country are also in the queue with strong expectations on rationalisation of tax system, improved taxpayer experience and inflation-adjusted tax benefits.

The Tax Administration Reform Commission (TARC), set up by the government to review the application of tax policies and laws in the context of global best practices, has come out with a detailed report. This report had indicated the current status of tax administration in India, global best practices, gap between the current structure and global best practices.

In this article, we have listed down some expectations from the upcoming budget from a personal tax perspective.

As always, the first and foremost expectation of every taxpayer is realignment/increase in the tax exemption limit. Currently, the exemption limit stands at Rs. 2 lakh for both men and women who are less than 60 years of age. The exemption limit can be enhanced to Rs. 3 lakh which will allow more cash and spending power in the hands of taxpayers.

Also, the tax base of net wealth can be widened and tax rate can be reduced to improve the compliance. Currently, wealth tax is applicable at 1 per cent if net wealth exceeds Rs. 30 lakh. The Direct Tax Code (DTC) 2013 proposed to increase the exemption limit to Rs. 50 crore and that the tax rate would be 0.25 per cent, with a change in the definition of 'assets'.

Given the globalisation and international business environment, certain international tax practices can be looked at, such as tax equalisation, claiming treaty benefit at the time of withholding, joint filings and deductions based on dependents.

Also, the government should bring in more clarity on taxation of stock option income, streamlining the provisions of tax residency certificate (when to obtain/ whom to furnish etc.) and introduction of DTC. TARC has also suggested that the government should come out with clear foreign tax credit guidelines, keeping in mind the timing differences between different tax jurisdictions.

Another significant area which needs a revamp is inflation adjusted tax benefits.

The existing deduction limit of Rs. 150,000 for interest paid on self-occupied house property needs to be revisited as the same was introduced in the Finance Act 2001. Considering the drastic increase in prices of real estate and the upward trend in inflation, it will be a boon if the limit is raised to Rs. 250,000/300,000

Also, the threshold for savings under Section 80C of the Income Tax Act can be increased from Rs. 100,000 to Rs. 200,000, which will allow the salaried class to save some tax and increase savings.

Certain areas in which amendments will be most welcome are: increase in the limit for medical reimbursements (currently, Rs. 15,000); conveyance allowance (Rs. 800 per month); children hostel (Rs. 300 per month/ child), and education allowance (Rs. 100 per month/ child).

One more significant expectation is 'improved taxpayer experience'.

The government should ensure that tax return forms are available on time to taxpayers and also improve the accountability measures with respect to tax assessments and refund process. One of the main intentions of electronically filing the return of income is that the return shall be processed early and the refund be granted faster. However, some taxpayers are not receiving the refund on time due to various reasons. Also, there is a need for administrative reforms with respect to processing of e-TDS returns by the tax department.

The budget should introduce stringent provisions such as timelines to issue refund and updation of refund status on a real time basis for the benefit of taxpayer.

TARC has recommended the following in order to improve taxpayers' experience and to align the tax payer services with prevailing best global practices.

Setting up of a dedicated organisation, resources and personnel to deliver tax payer services with customer focus

More specialised and intensive training to be provided to the officers and staff of tax administration

A minimum of 10 per cent of tax administration's budget is recommended to be allocated and spent on tax payer services

Providing pre-filled tax returns to all individuals, who would have the option to accept or modify the details

While there is a lot of speculation on the wish list, one needs to wait and watch for the final outcome.

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