Simplifying the Personal Income Tax Structure in India - Some ideas

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Hence the recommendation is that if these allowances are withdrawn and cancelled for claiming tax exemption,  the tax payer must be compensated by a like amount,  which can be done by raising the present Tax Exemption Limit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 4^th 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 4^th instance onwards.

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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.