Budget 2011 which is less than a months away will have a historical angle to it. It will mark the end of an era – the era of the almost five decade old Income Tax Act, 1961. Financial Year (FY) 2011-12 will be the last year to which the Income Tax Act will apply, from 1.4.2012 all of us will be following the new Direct Tax Code!
Annual budgets should normally be a statement of government finances. However, customarily, in our country, the Budget has become a forum where the government also declares its intended taxation and fiscal policy for the year. This year however could be an exception. The new Code with its sweeping changes is anyway going to be applicable from next year, so there is really no point in ringing in big ticket changes on the taxation front for all of just one year.
On the other hand, with rising input costs, tight liquidity conditions, rising interest rates and the combined central and state fiscal deficit pushing upwards of 10%, the headroom that Mr. Mukherjee has is extremely limited. So it will be interesting to see how the FM walks the tight rope.
That being said, if the Finance Minister indeed desires the upcoming Budget to be a memorable one, he would do well to pay special attention to the salaried class. I have said it before and I will say it again - it is unfathomable why governments, one after another, turn a blind eye to this significant constituency. In fact, it is this constituency that prepays its taxes to the government month in month out through the system of TDS. It is said that a good government should treat its citizens as customers. In which case, the salaried should form the list of the most important customers – those who not only pay up but prepay their dues year after year.
So, if there are five things that Mr. Mukherjee can do to this year to bring a smile his customers’ face these would be –
1. Reinstate standard deduction. Homeowners / landlords get a 30% standard deduction. Businessmen can set-off every expense that they incur to earn income. Then why treat the salaried differently?
2. Transport allowance deduction has remained at an absurd level of Rs. 800 per month. This is almost insulting to the employee.
3. Then there is the issue of deduction for medical expenses. Spiraling health care costs are a reality and there is no system of government sponsored health plans. In such circumstances, having a paltry limit of Rs. 15,000 in which the employee is expected to cater to the medical expenses of his entire family borders on the farcical.
4. The government wants to encourage education. However, education allowance for children has remained static for over twelve years now at Rs. 100 per month per child for a maximum of two children (earlier it was Rs. 50). Ditto for hostel allowance at Rs. 300 per month per child. The tuition fees deduction is included in an already overcrowded Sec. 80C. For many taxpayers, statutory payments like provident and superannuation contributions, home loan installments and insurance premiums make up the limit. There is no room left to claim the deduction for fees. A separate deduction for the same would be welcome.
5. There is actually one area where the salaried are better off than self employed people. Or more precisely, those self employed persons who stay in rented places. Most of the salaried get HRA and the consequent HRA deduction. But if a self employed person were to pay rent, the rent deduction available to him is a paltry Rs. 24,000 per year. Most people pay this much rent (if not much more) per month!!
This was as far as tax incidence is concerned. Now let us turn to another issue. Over the past few months, inflation (especially food inflation) has skyrocketed. Also, we all know that the actual inflation rate should be much more than what is officially declared. The official price index based on which the rate of inflation is compiled is misleading on account of various factors such as under-representation of the services sector, erroneous selection of the commodity basket as also the allocation of weightages. Consequently, the results are not going to be accurate. Want to know the more accurate rate of inflation? Ask the Indian housewife and home maker. She will tell you what she has been contending with year in year out.
With interest rates hardening of late, banks have upped their deposit rates. However, rates of popular post office and small saving instruments such as Post Office MIS or PPF or even the Senior Citizens Savings Scheme have remained static with the immediate consequence that the real returns on these instruments are in the negative, regardless of whether you consider official inflation or not.
What the common man, especially senior citizens require is some sort of a tax-free investment avenue. It was in July 2004 that the 6.5% tax-free bonds were discontinued. Simultaneously, Sec. 80L that offered a tax break on interest from investments was also dropped. So now, citizens are tackling the triple whammy of low interest rates that are fully taxable without any relief from either inflation or taxes.
It is common knowledge that India needs infrastructural development to continue and further boost its growth. This in turn requires big ticket investment for the long-term. Consequently, a move that will be win-win for all is to allow commercial banks to float tax-free long-term bonds with tenures of 10 to 20 years.
Apart from the above there are a few other issues such as applicability of exemption on capital gains to buybacks and open offers, taxation treatment of derivative transactions, distinction between a trader and an investor (as tax treatment for both differs) etc., that have long been left unaddressed. These are essentially legacies of previous years’ budgets where rules were changed but certain indirectly affected constituents of the system were left out.
What will actually pan out only time will tell. However, when it does, watch this space for a comprehensive analysis.
By the way, though the Income Tax Act will be redundant next year onwards, it will always be a part of my book shelf. After all, it’s not everyday that one comes across a book that contains everything from action, drama, comedy, adventure, mystery and sometimes even horror. Occasionally, it is even difficult to distinguish between fact and fiction! To that extent the Income Tax Act, 1961 will always truly remain a masterpiece.
The writer is Director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com
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