Proposals Related to some Procedural Aspects of Income Tax Administration in case of Individual Tax Payers in India

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 of Rs.60 lakhs by selling property 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 or is being questioned.

Their argument is that this is no longer the “Capital Gain” money since it has undergone change by having been "sullied” since it has 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 be incorporated,  and read, as under :

In case of Sec 80 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 from his bank account. The only caveat is that 2 persons should not claim benefit of a single deposit. 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 assessee will be eligible for capital gains tax exemption 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 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” Financial Year (FY) and Assessment Year (FY) should be done away with  and only FY 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. The average citizen are comfortable and familiar with FY and hence the proposal that there should only one type of year in IT dealings viz., FY.

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Proposal for Raising Sec 54E (Capital Gains) Deposit Limits to raise Cheap Development Funds for the Government

The present exemption 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 :

• 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) 

• 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) 

•  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.

ONE CAUTION

     Anyone making large deposits for Capital gains should not be questioned, interrogated, investigated or hounded for doing so.  The very fact that he/she  is placing money in a legal instrument is a big gain for the legitimate economy and probing beyond that will be counter-productive.  

     Of course,  while making such deposits,  the capital gains claimed has to be explained in terms of giving details of the transaction which yielded such capital gains and asking for necessary details of that transaction is perfectly okay.  But that is where it must stop. There should be no automatic imputation of "illegitimacy" simply because Capital gains amount deposited is large.

Proposal for Raising Sec 80C Deposit Limits to raise Cheap Development Funds for the Government

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.

Simplifying the Income Tax Structure for Individuals in India

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. 350 K (in case of Senior Citizens, raise it from Rs. 300 K to Rs. 400 K and in case of Senior Citizens above 80 years,  raise it from Rs.500 K to Rs. 600 K)

2.   Introduce, additionally, Standard Deduction @ 30 % of Gross Salary 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 purely 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 to 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.

How does an Organisation become Professional ?

An Organisation becomes Professional by

Ÿ  having Objectives that are

• clear
• durable
• communicated (throughout the organisation)
• adhered to
• modified and updated (whenever changing circumstances so dictate)

• having a  Structured Planning Process for achieving the Objectives (just achieving good results,  without a structured planning process,  is a matter of luck and can neither be counted upon nor any credit claimed for it, nor is it self-sustaining in the long run).

• having defined processes for executing the Plan with full and enthusiastic participation of the entire team.

• achieving its planned objectives regularly.

• having a  clear and sincere customer – focus.

•  treating all its employees fairly and with genuine care and compassion.

• treating all its suppliers fairly and respectfully (particularly in matters of timely and full due payment) and according them the status of business partners.

• treating all its shareholders (irrespective of size of holding) with equal care, attention & respect and disclosing fully, fairly and transparently, all information about the company’s activities, future prospects and risks,  to enable them take an informed judgement on their investment.

• being compliant with all laws, rules and regulations,  of the government and statutory bodies,  that are in force and apply to it.

• going beyond just compliance to being ethical in all its inter-actions with all its stake-holders

•  being sensitive to & respectful of Environmental, Safety, Statutory and Social  concerns & obligations.

• being conscious of and discharging, on its own initiative, obligations to the people living in proximity to its geographical locations, over and above what is called for by law,  in terms of providing or maintaining facilities that are of common and general public benefit – e.g. roads, schools, gardens/parks, rain water harvesting, public health/hygiene  and similar.

• continually benchmarking itself against best performance parameters,  internationally,  and striving to attain & surpass them.

     

     Mumbai

    June 10,  2004

What is Professionalism in an Employee ?

Professionalism in an employee means

Knowing one’s job and responsibility, fully and completely.   If not clear,  then seeking clarification from one’s superiors.

Learning, developing and practicing,  the best way of carrying out the assigned tasks - keeping in mind the quality, cost, delivery, legal, ethical,  environmental, and social  impact aspects and costs. 

How is this to be done ? 

·  Learning from books, manuals, training programmes,  other experienced people and from one’s own mistakes.

·        Making realistic but challenging commitments, particularly on time aspect.

·        Once a commitment is made,  moving heaven and earth to meet the same.  The 9 to 5 concept is no longer valid.  It has been replaced by the  A to Z  work style i.e. complete the entire job from A to Z before you leave.  Today’s work has to be done today  --  not carried forward to tomorrow.

·        Keeping your boss/superior fully and regularly informed of the progress you are making,  from time to time.  In case there is likely to be any delay from the  previous commitment or any shortfall from the committed quantity,  immediately informing your superior.  This will give him time to take any corrective action or get the job done by bringing in additional resources or from some alternative source. 

·    Nobody likes surprises,  especially surprises about slippages or failures. Hence always communicate,  regularly about your work with the concerned departments /sections  as well as your boss.

·    Treating your internal customer with the same respect and care as for an external customer  --  this will bring dramatic results and greatly improve team-work.

The above, in turn,  requires that the employee :

a)   reports in time for work.

b)   follows the discipline of the organisation.

c) behaves / inter-acts politely and pleasantly  with his/her colleagues, superiors, customers and all other persons that he/she comes in contact with,  in the course of his/her work.

d)   does not idle his/her time during working hours.

e)   keeps his/her workplace neat , clean and well-organised,  such that even in his/her absence,  colleagues can locate and access official working papers/documents/files without any difficulty.

f)     fills all forms and makes all reports, as required, regularly and in time.

g)   respects and adheres to all company and (geographic) location protocol and culture

h) respects and follows, diligently,  all safety and security practices and protocol.

 

Who is a Professional Manager ?

A professional manager is one

who is guided in his work & action by a set of core principles that are internally consistent and  non - violative  of  statutory and legal provisions.

who is consistent in the yardstick he applies for dealing with people and situations.

who has a  “broad  framework”  for analysing,  judging,  decision-making and taking  actions,   i.e.  one who is not arbitrary and  “seasonal”  in the practice of management.

who,  in addition to complying with legal and statutory provisions,  also has a set of ethical  and moral principles that he follows,   which are  “fair”  to those affected by his  decision-making and action.

who is willing to stand up for what he considers  right / correct   &  is not afraid to express an  “unpopular”  view point  nor  afraid to voice an opinion that doesn’t  agree with that of his boss.

who,  on a matter of principle,  is willing to quit rather than  “submit”  or  “go along”  with what he considers wrong or unethical or immoral or illegal.

who,  while being steadfast in sticking to his principles is,  himself,  always open to criticism,  and willing to change his ways when he discovers that they are wrong or outdated.

who,  on his own initiative,  seeks to enlarge his own body of knowledge or enrich his fund of experience through honestly acknowledged learning from others  ---  be they his superiors,  peers,  subordinates or professional colleagues.

who has the vision to see,  beyond his own job or company,  to the larger  interest / requirements / good   of his immediate community and society at large.

Ranchi

October  30,  1995

Who is a Professional ?

A Professional is one who

Has Knowledge about his profession or responsibility   i.e. he has specific and specialist knowledge about his job which comes from specific training and experience in that field,  e.g.  engineer, doctor, chartered accountant,  tailor,  sculptor  etc.

Has a definite and standard method of carrying out his work ;  in cases of deviation, has, again a set of standard responses for meeting the deviations or unexpected changes.  e.g.  doctor,  car mechanic,  electrician

But, in today’s  competitive world,  the word professional or professionalism has acquired a much bigger meaning.  It includes

·        Following a code of conduct appropriate to the profession you are practising  e.g.  doctor – patient relationship,  lawyer – patient relationship,   tailor,  actor.

·        Acting on a set of codified rules,  practices,  behaviours that have evolved through specialist knowledge and years of experience,  as opposed to an amateur or fresher.

·  Working in a planned manner,  taking into account various likely difficulties, obstacles and being prepared for the same.

·     Adhering to commitments – quality,  cost and time e.g. courier service,  laundry,  management report etc.

·    Keeping the customer or  “other person” regularly informed of progress in your work, delays if any, changes in milestones & corrective actions being taken

·        Accepting responsibility for commitments made and bearing loss,  if any,  resulting to you for extra work done to meet commitment.

·        Respect for the customer and/or the person you are dealing with.