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Income-tax on gross income or net income?
August, 07th 2007
Salaried people now pay income-tax on their gross income while businessmen, self-employed persons and others pay tax on their net income, even as the income-tax exemption limit is the same for everyone. This gross injustice needs to be removed.

As per Income-Tax Act of 1961, income-tax is levied on net and not gross income. Salaried people were allowed to deduct expenses incidental to their employment viz conveyance, books and periodicals, newspapers, etc, from their gross salary since Indian income-tax Act 1922 u/s 7(2). Then, the limit for such expenses was Rs 500 and the same was adopted verbatim in the Income-Tax Act 1961 u/s 16(i). With inflation, the limit for deduction u/s 16(i) rose from time to time.

In the Lok Sabha debate on Budget 1974, then finance minister YV Chavan made it standard deduction on the grounds of inevitability of such incidental expenses and it was decided that documentary evidence for such expenses would no more be needed to claim benefit of Standard deduction.

Till the assessment year 2005, the limit for such expenses was steadily raised up to Rs 30,000 or 40% of gross salary whichever was less. In the budget for assessment year 2006-07, finance minister P Chidambaram disallowed the standard deduction for salaried people on the grounds of raising the exemption limit to Rs 1,00,000 as well as on broadening of slabs of income-tax. The same budget could not be debated due to boycott by BJP, and salaried people became the victim of politics.

In fact, the former chief justice of India, Justice PN Bhagawati, has rightly mentioned in his book on income-tax that exemption and deduction are distinguished; so on mere increase of the tax exemption limit, the right of deduction cannot be taken away.

Due to hike in petroleum prices a substantial portion of salary is spent on conveyance. The Rs 800 conveyance allowance that is exempted from tax hardly takes this into account. Expenses on books, periodicals, newspapers also ought to be deducted while taxing the income of salaried people, as is allowed while levying tax on other assessees under other heads of income viz house property, business profession, capital gain, other sources of income. This provision is also available in other countries viz USA, France, England, Switzerland, etc.

On November 6, 2006, a member of the Central Board of Direct Taxes also accepted the anomaly and proposed reinduction of standard deduction from 2007. This was reported in several leading newspapers.

Due to the ignorance of masses and politicians, and the wholly unjustifiable process of passing the Budget without any discussion in Parliament, after a closed budget-making process even in this era of transparency, salaried people are condemned to pay tax on gross receipts while other assesses are paying their tax after deducting from their gross income several incidental expenses as a matter of right.

It is the height of injustice that more than 2.7-crore salaried people are paying tax on their gross incomes while others, whose incomes arise from sources other than salary, pay tax on their net incomes.

R K Gupta
(The author teaches at Govt Post Graduate College, Noida)
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