Revealed: the future of income-tax

BANGALORE: “Only little people pay taxes,� Leona Helmsley, a US-based real-estate tycoon and hotelier had remarked during her salad days, before she was held guilty of tax evasion.
Most readers will agree that the salaried middle-class is worst hit when it comes to bearing the tax burden. We all have a massive wish-list, but newly-anointed finance minister P Chidambaram is no Santa Claus. Nonetheless, during recent public-appearances, he has been the picture of reassurance, saying there will be no roll-back of reforms and that government policies will be fine-tuned to make it “painless for the poor�. One hopes that the middle-class is not left out.
It has to be accepted that widening of the tax slabs will go hand-in-hand with abolition or dilution of certain tax sops. Finance ministry advisor, Vijay Kelkar, in his report, doubled the exemption limit for payment of taxes from the current level of Rs 50,000 to Rs 1 lakh. He also suggested that only those earning above Rs 4 lakh or more pay tax at the maximum rate.
The Shome Committee report on tax reforms, too, had restructured the tax slabs. But these suggestions came along with abolition of various tax exemptions, deductions and rebates. The question is: Where will Mr Chidambaram draw the line? Responding to the CMP, he has said, “The proportion of tax revenue to the GDP will be raised, not through retrograde raising of tax rates, but through moderation in taxation and voluntary compliance.�
Yet, there will be a cess on all central taxes to fund education. Should the FM abolish all tax sops, including standard deduction — deductions towards HRA, LTA, medical allowance and interest on housing loans — or even those sops that are investment-related, such as bank interest, or rebate for PPF, NSC and post office schemes?

Abolition of all these exemptions is like a nightmare for the middle class. It may be equally bad for the economy, as it will curtail purchasing power. The FM and his team must already be crunching the numbers to strike the right balance.
Increase in standard deduction is something that every salaried person looks forward to, come Budget time. In one shot, it reduces the taxable salary income. While the Shome Committee had called for its downward adjustment, the Kelkar Committee had advocated its complete abolition.
The latter had held that since salaried employees get an annual tax-free transport allowance of Rs 9,600, it is difficult to visualise any other employment-related expenditure, other than personal expenses, and there was no need to continue with this ‘compensation’ for the salaried class.
Currently, standard deduction of Rs 30,000 is available; but if salary income exceeds Rs 5 lakh, it is lower at Rs 20,000. It is quite doubtful whether a total abolition of standard deduction will see the light of the day, but emboldened by its recent electoral successes, the government might be tempted to dilute it for salary incomes over Rs 5 lakh. For those who don’t own a house in the city where they work, HRA plays an important role.
A deduction is available, subject to certain conditions. The computation is slightly involved and the deduction is limited to the lowest of the following –– the HRA actually received or the actual rent paid in excess of 10% of salary or 50% of salary for metro regions (for other regions it is 40% of salary). Even then, losing this deduction altogether, as suggested by the Shome committee, will cause heartburn. The Kelkar report, though, does not seem to have found this objectionable, as it is not on the black list of his report.

Interest payable on housing loans up to a limit of Rs 1.5 lakh is currently allowed as a deduction. The Shome Committee had expressed shock that the deductibility of interest on housing loans was hiked from Rs 5,000 to Rs 1 lakh by the Finance Bill ’00, and to Rs 1.5 lakh in ’01. It wants this deduction discontinued. The Kelkar report was more practical, suggesting reduction in the deduction to Rs 50,000. Both suggestions were made when interest rates were headed southwards.
The proposals made sense then, but with global interest rates showing signs of firming up, the ball is squarely in the FM’s court. A well-earned annual leave, especially if it comes with a leave travel allowance (LTA), adds zest to the vacation, even if it can be claimed in respect of only two journeys in a block of four years.
Currently, a sojourn to any place in India with one’s immediate family is exempt from tax. The maximum exemption is restricted to economy class airfare by the shortest route to the holiday destination. The Shome report wants to put an end to this, but the Kelkar Committee is non-committal.
So what does the FM plan to do? Surprisingly, both the reports were silent on medical bills. Tax exemption of medical reimbursement by the employer up to Rs 15,000 is a necessity. With medical costs spiralling, and with no proposals to the contrary, hopes are that the FM will hike this limit.
However, the reports did not approve the deduction available for mediclaim premium. Currently, a deduction is available from gross salary income of mediclaim premium up to Rs 15,000 per year. Both the Shome and Kelkar reports decided to convert this deduction into a tax rebate. In other words, as per the recommendations, Rs 1,000 and Rs 3,000 would be deducted from the tax payable.

With education being on the priority list of the new government, one hopes that the tax sops available for repayment of interest and principal on loans taken for higher education will continue. Today, a deduction of Rs 40,000 per year is available for a maximum period of eight years. Both Shome and Kelkar agreed that it should be converted into a tax rebate of a maximum of Rs 4,000.
Coming to investments, one can definitely hope for continuance of the existing relief, greater protection to the small investor and also more avenues for investments.
Currently, interest on certain securities such as NSC certificates, post office schemes, notified bonds, bank deposits are allowed as a tax deduction subject to a maximum ceiling of Rs 12,000. Both the Shome and Kelkar Committees wished this deduction away, however, Mr Chidambaram is unlikely to follow suit. Tax rebates are also available for contributions to provident fund, PO schemes and NSC, provided the taxable income is less than Rs 5 lakh.
So, what will the future hold. It is likely that retail investors will have a lot to smile about post-Budget announcements. Currently, long-term capital gains on certain listed securities purchased between March 1, ’03 and March 1, ’04 are tax exempt. Jaswant Singh had announced his intention of extending the exemption till February 28, ’07.
Mr Chidambaram may not want to act spoilsport, and it goes without saying that dividend will continue to be tax exempt in the hands of the shareholders, with perhaps a lower hit for India Inc in the form of dividend distribution taxes.