Budget 2013: Personal tax measures that FM should look at
Tax & Regulatory services
Ernst & Young
Senior tax professional
Ernst & Young
February is a month of expectations and these come in from all corners- the salaried individual, the housewife, the student and of course the corporate India. It's the month of the Indian Union budget- the blue print of the allocation of finances, the ways and means of achieving targets and a road map of the year ahead.
For the common man, the list of expectations is many and varied and Numero Uno in his list of concerns is the burning reality of inflation.
Whilst India's GDP to tax collection ratio is a cause of concern, the measures adopted to bring about an increase in the revenue coffers have directly or indirectly hurt the salaried individual.
Its thus about time that the taxman took a relook at the tax slabs and the various monetary limits for exemptions and deductions prescribed in the income tax statute, keeping in view the current economic climate. The Finance Minister has voiced his belief in the stability of tax rates and a non adversarial tax compliance regime and this February is thus much awaited, much anticipated.
Some food for thought:
The maximum tax rate is triggered at discerningly low levels of Rs 10 lakhs ($18,000 approx) whereas in countries like China and the US, there is more equity with the highest rate being applied to incomes above $150,000 and $400,000 respectively.
The exemption limits for education allowance, transportation allowance, hostel allowance and medical expense reimbursement are archaic and need to be overhauled to keep them in consonance with the actual expenditure levels.
There is also need to revisit the tax breaks on leave travel concession. With higher salaries, travel to foreign locations is no longer a thing of the past. Thus, the need of the hour is to realign the tax benefit to include foreign travel and possibly accommodation as well. A topic close to every middle class Indian's heart is "real estate" and the tax breaks available for mortgage interest.
The current limit of Rs 150,000 for self occupied property (Rs 30,000 in some cases) really needs to be reviewed in light of the skyrocketing property prices and rising home loan rates. There have been recommendations regarding this in every budget and whilst an increase in the limit to Rs 2 lakh is in the news, this may not be enough to fuel the rising costs. The limit should be enhanced significantly or even removed to bring it in line with the benefits offered for rented properties, where the mortgage costs are allowed as a set off from income without any limit.
There is currently no standard deduction from salary income and whereas this is on top of the wishlist, another plea is a relook at the current limit of Rs 1 lakh for deduction on account of various investments under Section 80C of the Income Tax Act (for provident fund, life insurance etc). The Direct Tax Code (DTC) has been in the pipeline for quite some time now but there are a lot of open and debatable issues marring its smooth implementation. Accordingly, while one school of thought is aligned towards shifting the implementation of the DTC by a year, it is however expected that the taxman may look to realign the current income tax statute towards the DTC.
A very welcome step would be the introduction of specific guidelines to make the process of obtaining income tax refunds efficiently and setting up a time limit within which the authorities have to issue the refund, would go a long way in achieving that one big objective of transparency. The Finance Act 2012 had introduced the concept of a Tax Residency certificate (TRC) for claim of benefits under income tax treaties. From the point of view of the globally mobile employee and an employer-it is expected that the budget may throw some clarity on issues such as, when to obtain the TRC and recourse to be taken if the host country does not issue the document etc.
Certain specific measures to enhance India's tax-GDP ratio may be taken in this budget - introduction of tax on the super rich being one of them. Mr. Chidambaram has said, "there is an argument that when the government requires more resources, the very rich should willingly pay a little more." However, the introduction of any such measure can be justified only if it is accompanied by a broadening of the lower and middle class tax rates. The reintroduction of inheritance tax is being mulled over by the Finance Minister, as another measure for making India's tax system more progressive.
Inheritance tax was levied in India between 1953 and 1985 and if reintroduced would definitely be a step towards reduction of inequality arising due to transfer of assets from one generation to another, but it has got alarm bells ringing with the underlying fear of double taxation in the hands of the creator as well as the beneficiary.
The fact that Chidambaram has presented six budgets already is resounding and it would be interesting to see whether he introduces any real reformative measures to revive the economy and relieve the common man from the woes of inflation and inequality. These are the questions that can be answered only on February 28.
(Views expressed are personal)