Proposals
Related to Simplification in IT Structure
These changes are
suggested in the Income Tax Act with a view to greatly simplifying the
Taxation and Tax Computation Structure.
There is no recommendation here
to reduce the Income Tax rate.
Apart from the
simplification it will result in, it will also mean a tremendous saving for
the Employers’ (Govt & Private
Sector) and the IT Department in the administrative costs of computing and determining
Income Tax as well as Salary Slip
printing & stationery costs
My
basic recommendation is this : Scrap all Tax Free
allowances and compensate for the same
by due adjustment of “initial tax exemption amount” and “Tax Slab Adjustment”
The major Allowances
that currently qualify for Tax Exemptions (under various conditions and
particularly for the salaried class) are :
Sl
No
|
Type
of Allowance
|
Normal
Amounts for which Tax Exemption Claimed Annually
|
Guesstimated
Weighted Average of Exemption Claimed (Annually)
|
1.
|
House
Rent Allowance
|
Rs.
60 K to Rs. 720K
|
Rs.
300 K
|
2.
|
Medical
Allowance
|
Rs.
15 K
|
Rs.
15 K
|
3.
|
Leave
Travel Allowance
|
Rs.
15 K to Rs. 100 K
|
Rs.
40 K
|
4.
|
Conveyance
Allowance
|
Rs.
9.6 K (Rs. 800 p.m.)
|
Rs.
9.6 K
|
5.
|
Food
/ Meal Allowance
|
Rs.
10.5K (Rs. 875 p.m.)
|
Rs.
10.5 K
|
6.
|
Educ
Allowance
|
Rs.
2.4K (for 2 children)
|
Rs.
2.4 K
|
|
|
TOTAL
WEIGHTED AVERAGE of EXEMPTION CLAIMED ANNUALLY
|
Rs.
377.5 K
|
Hence the
recommendation is that if these allowances are withdrawn and cancelled for claiming
tax exemption, the tax payer must be
compensated by a like amount, which can
be done by raising the present Tax Exemption Limit from Rs. 200 K to Rs. 577.5 K.
Assuming that the
guesstimated figure of Rs. 377.5 K being
claimed as exempt from Income Tax is correct,
the fact remains that this is essentially applicable for Salaried
Persons. Thus, raising the Tax Exemption limit to the full
extent of the above “estimated Tax
Exemption Loss” will bestow an unintended tax reduction benefit on all those who are not salaried persons.
Keeping the above in
mind, the following is recommended.
a) Complete
Withdrawal of Tax Exemptions under the above 6 heads.
b) Compensate
for the corresponding tax increase on the taxpayers as follows :
1. Raise Minimum Tax Exemption
Limit for all tax payers from the current Rs. 250 K to Rs. 400 K (in case of Senior
Citizens, raise it from Rs. 250 K to Rs. 450 K and in case of Senior Citizens
above 80 years, raise it from Rs.500 K
to Rs. 600 K)
2. Introduce Standard Deduction
for all salaried persons subject to a maximum of Rs. 100K
3. Raise the Income Slabs
for 10 % and 20 % Income tax Rates as under :
i) Change
10 % IT Rate Slab from the current Rs. 201 K - Rs. 500 K to the
revised Rs. 201 K - Rs. 800 K
ii) Change
20 % IT Rate Slab from the current Rs.
501 K - Rs. 1000 K to the revised
Rs. 801K - Rs. 1500K
The rationale behind
the above recommendations is as under :
a)Compensate
the tax payer for the withdrawal of various tax free allowances by raising the
minimum tax exemption limit ; in doing
so, it is true that some people who are not salaried persons will get a
“bonanza’ because of the raising of this tax limit.
b) To
restrict such ‘bonanza” the minimum tax
exemption limit raise has been restricted to Rs. 100 K only.
c) However, to compensate the salaried tax payers who
were availing this tax exemptions, they
are compensated by giving them a tax relief through the “standard deduction
route” which is applicable only to salaried employees.
d)Finally,
the higher bracket salaried persons who are not fully compensated in the tax
exemptions they used to enjoy under various allowances (which are proposed to
be withdrawn now), the Slabs for 10 %
and 20 % IT rates are proposed to be
widened so that they get compensatory relief there.
The above is intended
to be a purely as a revenue – neutral but
Income Tax Structure simplification
measure, which will have the
following concomitant benefits :
1.Tax
Computation and Tax determination will become far simpler and easier.
2.Tax
Structure of various organisations (government and private) can be drastically
simplified by reducing the number of heads of payment, which
were primarily introduced to take advantage of the various tax exemptions so
far allowable under the Income Tax Act ; thus every salary structure can
now have as much as 6 fewer “heads of
payment” viz., HRA, Medical, LTA,
Conveyance Allowance, Food Allowance and Education Allowance, since having these heads will no longer reap
any tax benefits.
3. This
also means that people will not have to fudge and manufacture documents for
claiming tax benefits, particularly
for the heads related to HRA, LTA and
Medical. To that extent, the IT department does not have to spend time
and energy in “verifying” that such
claims are genuine or not, which will mean a tremendous saving in
administrative time spent and costs incurred for such work in the IT Department.
The figures mentioned
above are purely based on the undersigned’s best estimates and are certainly
not claimed ot be accurate. It is
recommended that, based on the
information available with the IT department and the government, these
figures may be fine-tuned and the various figures adjusted to result in a
revenue- neutral, re-alignment of the
Income Tax Structure.
Thereafter, if the government wishes to give some tax
relief to the tax payer, it may do so in addition to what is recommended above.
This
is also in consonance with the spirit of the
Direct Tax Code (DTC), that
is built on the very sensible premise of scrapping all exemptions and
compensating for the resultant
“increased tax liability” by a
suitable tweaking of tax rates, tax slabs and minimum tax exemption limits.
Proposals
Related to Increasing Deposit Limits in
Sec 80C Avenues Like PPF to Benefit Individual Tax Payers and at the same
time give Cheaper Funds to Government for Developmental Work
The basic
Recommendation is : Raise the present exemption limit
of Sec 80C deposits from the current Rs.
1.50 lakhs to Rs. 25 lakhs as under :
a)
Rs. 1.50 lakhs can be deposited in any of the
currently available avenues like PF, PPF, LIC,FDs of 5 years tenure and
longer etc. (i.e.
no change proposed)
b)
Deposits beyond Rs.1.50 lakhs upto Rs. 25
lakhs can only be made in PPF
under the following provisions :
1.
For deposits from Rs.1,50,001 upto Rs.
5,00,000/- the interest rate paid in PPF deposits will be 2 percentage points less than the declared
PPF rate for that year (which is applicable to the deposit of the first
Rs.1.50 lakhs)
2.
For deposits from Rs.5,00,001 upto Rs.
10,00,000/- the interest rate paid in PPF deposits will be 5 percentage points less than the declared
PPF rate for that year (which is applicable to the deposit of first Rs.1.50
lakhs)
3.
For deposits from Rs.10,00,001 upto Rs.
25,00,000/- the interest rate paid in PPF deposits will be NIL.
c)
As can be easily understood, the government will get a huge cache of cheap
and almost NIL cost funds for the price of foregoing some taxable income (a
fair part of which it was losing anyway because people may have been avoiding
declaring the same to avoid / evade
paying income tax).
d)
Even more important, the deposit of so much money in government
coffers means that development works can be tremendously speeded up without the
government running up huge deficits because these funds are coming at
substantially lower costs.
e)
Finally,
the mopping of so much money from individuals will have a salutary
effect on inflation that is fuelled by excess of money supply in individual
hands.
Proposals
Related to Increasing Deposit Limits in Sec 54E Avenues Related to Capital
Gains Tax to Benefit Individual Tax Payers and at the same time give Cheaper
Funds to Government for Developmental Work
The present limit of Rs. 50 lakhs of deposit in Sec 54E
instruments was fixed over a decade ago and since then there has been a
tremendous increase in property prices (land or buildings) and this makes the present limit
very unrealistic and unfair
to the individual tax payer.
In the light of the above, the basic Recommendation
is : Raise the present exemption limit
of Sec 54E deposits from the current Rs. 50 lakhs to Rs. 10
crores as under :
a)
Increase the Rs. 50 lakhs deposit limit to
Rs. 1 crores in any of the currently available avenues like REC Bonds etc. as
per present practice for obtaining Capital Gains Tax Exemption (i.e. an
increase of Rs.50 lakhs benefit to the tax payer)
b)
Deposits beyond Rs. 1 crore upto Rs. 10
crores can only be made
under the following provisions :
1.
For deposits from Rs.1,00,00,001 upto
Rs.2,00,00,000/- the interest rate paid in Sec 54 E instruments will be
2 percentage points less than the prevailing rate for that year
(which is applicable to the deposit of the first Rs.1 crore)
2.
For deposits from Rs.2,00,00,001 upto Rs.
5,00,00,000/- the interest rate paid in Sec 54 E instruments will be
4 percentage points less than the prevailing rate for that year
(which is applicable to the deposit of the first Rs.1 crore)
3.
For deposits from Rs.5,00,00,001 upto Rs.
10,00,00,000/- the interest rate paid in Sec 54 E instruments will be NIL.
c)
As can be easily understood, the government will get a huge cache of cheap
and almost NIL cost funds for the price of foregoing some taxable income (a
fair part of which it was losing anyway because people may have been avoiding
declaring the same to avoid / evade
paying income tax).
d)
Even more important, the deposit of so much money in government
coffers means that development works can be tremendously speeded up without the
government running up huge deficits because these funds are coming at
substantially lower costs.
e)
Finally,
the mopping of so much money from individuals will have a salutary
effect on inflation that is fuelled by excess of money supply in individual
hands.
Proposals
Related to Some Procedural Aspects of Income Tax Administration in case of Individual Tax Payers
1.
There is considerable confusion prevailing
over Source of Funds used to make Sec 80C deposits and Sec 54E deposits which
results in long exchanges of clarifications and/or disputes, issuance of demand
notices and appellate proceedings.
2.
The disputes are of the following kind :
Income Tax Department asserts that
2.1
In case of Sec 80 C deposits, the deposit should be made out of income
earned by the Assessee for that financial year
and/or
2.2
In case of Sec 80 C deposits, the deposit should be made from the Bank
Account of the Assessee ; deposit made by someone else (say, father) is not
considered eligible for Sec 80C benefit.
2.3
In case of Sec 54 E deposits, the deposit should be made out of the
specific Capital Gain amount and the onus of proving this lies on the Assessee.
Let
me illustrate this point : If
the assessee makes a capital gain by selling property of Rs.60 lakhs and then
deposits these proceeds for a temporary period of 5 months in a Fixed Deposit
to earn some money (on which he, of course pays applicable tax), then his subsequent deposit in Sec 54E Bonds
before the expiry of the 6-month limit for doing so is not being accepted by many ITOs.
Their argument is
that this is no longer the “Capital
Gain” money since it has undergone
change by having been "sullied” with it having been invested in FDs
!
2.4
In case of Sec 54 E deposits, earlier,
the Capital gains arising from sale of property could be invested in
more than one property and the amounts so invested were eligible for capital
gains tax exemption.
A change in rules has
made this ineligible, with investment in
only one property being allowed for claiming Capital Gains Tax exemption.
This is clearly
counter-productive and reflects a vindictive attitude towards the
assessee. It is well known that many
times ancestral and long-held properties are sold to enable the assessee to buy
multiple properties for distribution amongst
multiple claimants like his children,
or siblings etc
In such a case, to
deny him the benefit of the Capital Gains exemption would be clearly
unfortunate and would tend to frustrate his purpose of selling his original
property or encourage him to conceal the actual consideration to avoid tax.
To avoid all such disputes that arise from the
above-enumerated situations, it is suggested that ample clarification be issued
in the Act itself so that there is no scope for laboured interpretations in these
matters. The proposed clarification may possibly read as under :
In case of
Sec80 C deposits, it is stated,
for the sake of ample clarity, that the assessee will be eligible for availing
tax benefits under this section so long as he/she makes the deposits in the
specified instrument within the time period specified for a particular
Assessment year and such deposits will not be called in question or
investigated as to their source for the purpose of his availing the exemptions
prevailing under law. To further clarify, there will be no denial of such tax
exemptions on the ground that the deposit is not from his income for that year
or that it is not form his bank account.
The only caveat is that 2 persons should not claim benefit of a single
depots. Hence if a father makes Sec 80 C deposit in his daughter’s PPF Account either
the father or the daughter can claim benefit of the same, not both
In case of
Sec 54E deposits, it is stated for the sake of ample clarity that so
long as money equivalent to the capital gain has been deposited in the
specified Sec 54 E instruments and within the permissible time limits, the
assess will be eligible for capital gains tax emption and he/she is not
required to prove any connection between the money so deposited in Sec 54E
instruments and the money received by
him as a result of the capital gains made.
It is further laid down that in case of Capital Gain from
Property, investments in more than one
property are eligible for capital gains exemption, and there is no restriction
that investments made in only one property
will be eligible for Capital Gains Tax exemption..
Rationale for the above 2 changes proposed in IT Act
What is the legislative intent of these exemptions, be it
under Sec 80C or 54E ? It is primarily to reward the Tax payer for his denying
himself the use of monies that he has earned (by way of regular income) or
money he has gained (as a result of capital gain).
In such a case, so
long as the tax payer fulfils the requirement of depositing the money in the
specified instruments within the specified time limit and for the specified
“denial period”, it should qualify him
for earning the exemption provided in the laws and there should no other requirement
or to test or interpret his intent.
3.
Next we
have the question of incorrect submission of PAN Number. The current law lays down that if a wrong or
incorrect PAN Number is given, the ITO
can impose a penalty of Rs. 10,000/-
This is absolutely unnecessary and uncalled for. This provision simply does not recognise that
there can be a genuine error, a handwriting mix-up or some such innocent
thing. Hence the better thing is, just
like in case of incorrect entry of password on many internet sites, repeated
entries are allowed, at the very minimum
at least 3.
Similarly,
it is proposed that only if the PAN Number is submitted wrongly 3 times, the 4th such infraction should be
slapped a fine of Rs.10,000/- This is
NOT to suggest that wrong/incorrect PAN Numbers should be accepted on 3 occasions ; the suggestion, merely, is that
NO PENALTY should be levied for the first 3 mistakes and the PENALTY should
only be levied from the 4th instance onwards.
.
4.
There is a similar problem with Assessment
year. If you enter the wrong Assessment Year whist making TDS payments or
Advance Tax payments, then the same
cannot be corrected !!! Unbelievable,
but true. You are required to make another payment for the correct
Assessment Year and then claim back the erroneous payment made by filing a
claim for the same. This is absolutely
ridiculous. The Rules and the IT payment Software must allow for a correction
to be filed in the AY, as soon as such
an error is detected by the Assessee.
5.
In the light of the above, it is further
proposed that the existence of 2
“different year classes” FY and
AY should be done away with and only FY
(Financial year) should be used for all purposes. Since every FY is uniquely
coupled with a corresponding AY, there
is no sense in having two types of years.
All normal citizens are comfortable and familiar with FY and hence the
proposal that there should only one type of year in IT dealings viz.,
FY.
Mumbai
January 25, 2015
hemendra k.
varma is
an Alumni of IIT, Kharagpur and IIM,
Ahmedabad. Currently, he is the managing director of “pratik management productivity
systems”, a mumbai – based management
consultancy organisation. He can be
contacted on hemenvarma@pratikmps.com.