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Posted at: Jan 15, 2018, 12:01 AM; last updated: Jan 15, 2018, 12:01 AM (IST)BUDGET PRECURSOR: WILL FM LEAVE ENOUGH MONEY IN YOUR HAND?

A TIGHTROPE WALK

It makes sense to re-introduce standard deduction so that salary earners can get partial relief from the rising inflation
A TIGHTROPE WALK
Illustration: Sandeep Joshi

SC Vasudeva

THE country may have gained 30 points in the "ease of doing business" index, but the two back-to back disruptions - demonetisation and hasty implementation of the Goods and Services Tax - have been catastrophic for the urban middle class as well as the farming community. Naturally, they are looking at the forthcoming Budget to provide some relief.  Expectations are also high because this is the last full Budget of the BJP government before the 2019 General Election. 

It is, however, difficult for the Finance Minister to meet the expectations of all segments mainly because of financial constraints being faced by the government. Even as the direct taxes collections in the first nine months of the current financial year have shown significant jump, the GST collection is, however, sluggish. The FM will, therefore, have to generate additional resources to provide necessary relief to the wounded economy and the politically crucial segments of society. 

The salaried class

The salaried class has always been the most affected category of income tax assesses. Their income is subject to tax deduction at source and therefore, has little scope for any tax planning.  In view of this it makes sense to re-introduce the standard deduction, which was allowable a few years back, to enable salary earners to get a partial relief from inflation as well as to offset the expenditure on conveyance etc; incurred by them. In case it is not possible to bring back the standard deduction, then specific deduction for conveyance expenditure presently fixed at Rs 800 per month should be increased to at least Rs 3,000 per month.  

Section 10 of the Income-Tax Act 1961, provides that children education allowance is exempt up to Rs 100 per month.  It should be increased to Rs 3,000 per month.  Similarly hostel expenditure for students should also be increased from Rs 300 per month to Rs 5,000 per month.  

Medical reimbursement presently fixed at Rs 15,000 should be increased to Rs 50,000.  Deduction available under Section 80D (tax deduction based on health insurance premium paid) should be simultaneously increased to Rs 50,000 without any restrictive clause. 

There is general impression that the income up to which tax is not payable requires to be increased from Rs 2.5 lakh to Rs 5 lakh.  It is also felt that the slabs of 10 per cent, 20 per cent and 30 per cent require tweaking. The proposed suggestions, if implemented, would enable the salaried class to brave the inflation and to meet their day-to-day expenditure with ease.

The elderly

India has a poor record of savings for retirement. Making pension plans more tax friendly will create favourable ground for savings among the self-employed and businessmen. The current scenario wherein a person has to pay tax on pension received on the maturity of pension plans needs to be changed to  motivate more people to buy pension plans. The government should also encourage people to buy insurance products as security for life partners or dependents. Therefore, GST on insurance products also needs to be reworked. At present life insurance products invite 18 per cent GST, which can be a deterrent given the fact that the country already has a very low, 3-4 per cent, insurance penetration rate.

The housewife

Rising inflation has upset the budget of housewives. It seems that there is no immediate respite from rising prices of essential commodities. The increase in oil price to about $70 a barrel is bound to further stoke the inflation. The GST has also been instrumental in increasing the prices as necessary deduction on account of the availability of the input credit is not being passed on to the consumers as of now.  It is, therefore, essential that the GST should have only three slabs i.e. zero per cent, five per cent and 15 per cent. The 28 per cent tax should be leviable only on luxury products or sin goods such as tobacco products and alcohol. The compliance cost of GST should also be reduced. Although, the indirect tax is now outside the direct purview of the budget, FM may give hints to reform the newly introduced GST regime. These steps are bound to lead to increase in GST collections and enable households to have more disposable income in their hands. 

The student

At present students are allowed a deduction for interest on loan raised for higher education. Currently, this deduction can be availed for only eight years (under Section 80E). With the interest rates being in the range of 10.5-13.5 per cent and increase in the cost of higher education, the EMI liability given the eight-year time limit is very heavy. For a loan of Rs 20 lakh at the rate of 12 per cent the monthly EMI will be over Rs 32,500. For an average Indian family availing the loan this EMI can be a huge deterrent. If this term is extended to 10 or 15 years then the EMI burden will be reduced substantially. Thus, extending the loan term limit is the need of the hour that will see more bright students opt for quality higher education. This will lead to an increase in the talent pool for the country. Moreover, allowability of deduction of tuition fee, even partly, for higher studies in India and abroad would go a long way in enabling students to acquire knowledge in subjects for which there are limited number of seats available in India. The present deduction under Section 80C of the IT Act is not sufficient to cover such an enhancement in tuition fee.  A separate deduction in this respect would be most desirable.

Housing for all

Under 'the Housing for All by 2022' mission, the Prime Minister had paved the way for providing housing facility to each family in the country. It would, therefore, be essential to provide necessary relief in income-tax for the construction of the houses. The deduction for interest on the amount borrowed for the purpose of construction or purchase of the house should be increased from Rs 2 lakh to Rs 5 lakh per year. The amount of interest paid during construction period should also be allowed to be offset against other income in the year in which the same is paid instead of being spread over a period of five years. Further, the restriction of five years for the completion of the construction should be withdrawn. This withdrawal is essential in view of the current scenario of the real estate sector as even most of the builders have not been able to construct the flats within a period of five years. These suggestions will go a long way in giving a boost to the real-estate sector which is reeling under a prolonged slowdown at present. 

The farmer

The rural economy - which is also politically significant in view of elections in eight state - has great expectations from this Budget. The party in power has had a taste of the effect of farmers' distress in Gujarat elections, which it could win by a thin majority. The FM is expected to focus on the rural development. One of the key issues is the remunerative price for the agricultural produce. This can be achieved by allowing direct market access sans middlemen. Besides, farmers need a regular supply of water for irrigation and lower cost of inputs such as power, seeds and fertiliser.  

All these measures would require additional funds. It is likely that the FM may withdraw mindless exemptions, prune expenditure and introduce new levies to present a balanced budget. One of the major sources of revenue could come from the stock market. The Bombay Stock Exchange has reported that the exemption from taxability of long-term capital gain has led to a revenue loss of about Rs 500 billion. One of the ways to generate additional revenue would be to enhance the holding period for short-term capital gain for listed securities from one year to three years. 

STANDARD DEDUCTION WITHDRAWN

"Given the higher exemption limits and the scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction." FM Chidambaram, Feb 28, 2005 

WHY RESTORE: 

  • Globally, it is the part of income that is not subject to tax
  • Standard deduction was abruptly withdrawn from 2006-07
  • Like corporates, only net income after expenses should be taxed
— The writer; a Delhi-based Chartered Accountant, is the Managing Director of S.C. Vasudeva & Co

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