Budget 2009: Tax-free income of Rs 3 lakh?

In every budget, changes in direct tax rates are keenly tracked by the common man since these have a direct impact on disposable income. In earlier days, pre-budget apprehensions of increase in tax rates were common but that trend has been reversed since 1997 when the then Finance
Minister P Chidambaram brought down income tax rates
to what is now called "resting levels."

The reduction was premised on the theory of lower rates, better compliance, and as this gamble paid off in the initial years, income tax rates have remained unchanged since 1997 though there have been some alterations in slabs and surcharges have been imposed.

One of the key tasks before the newly elected government is to propel the economy to a higher trajectory, combat recession and lower the fiscal deficit. It is well recognised that tax rates affect taxpayers' economic behaviour i.e. choice between work and leisure, the choice between consumption and savings, and also the compliance behavior of taxpayers.

While introduction of further stimulus packages is unlikely given the current revenue deficit, there is some room for boosting the economy through rationalistion of income tax rates for individuals. Such fiscal measures will boost individual purchasing power, and could lead to increase in aggregate demand in the economy for industrial as well as consumer goods. Thus, personal tax reforms could help the new government to meet the tough challenges lying ahead and also meet the expectations of the 'Aam Admi'.

Below are some recommendations that could ease the income tax burden on individuals, and win brownie points for the newly elected government.

Reducing maximum marginal rate of tax

In the context of the on-going economic slowdown, the idea is to encourage consumption spending by leaving more money in the hands of the people.Lowering of personal tax rates and raising the income level slab at which the highest rate are applicable will go a long way in this direction.

In India, the maximum marginal rate of income tax for individuals is 33.99%, (including surcharge and education cess), which is on the higher side compared with other countries. To elaborate: peak rate in Singapore is 20%, 17% in Hong Kong, 20% in Egypt and 28% in Malaysia. Peak rate in other countries is attracted at a significantly higher income slab and the threshold limits are much more. Thus, the government could consider a reduction in peak rate from the current 30% to 25%, which, along with applicable surcharge and education cess, will work out to 28.33%. The peak rate should be made applicable to an income slab of over Rs 10,00,000.

Also, the current basic exemption limit of Rs 1,50,000 should be increased to around Rs 3,00,000 i.e individuals earning income up to Rs 3 lakh would be exempted from paying income tax. This will increase the purchasing power of individuals and stimulate demand....

Reduction in rate of surcharge

The rationale of levying surcharge was to generate revenue through taxation in case of national emergencies like earthquake, war etc. In past, such emergencies, like the Gujarat earthquake and the Kargil war justified the levy of surcharge. Continuing with the surcharge even after the emergencies are over is not justified and fair.

Currently, surcharge on income-tax is @ 10% on individuals having a total income above Rs 10,00,000 – this surcharge should be withdrawn.

Benefits for salaried class

Revival of standard deduction: The standard deduction for salaried employees should be revived. Standard deduction is not a personal allowance but was earlier given as a lump sum for meeting employment-related expenses such as on conveyance, books etc. Similar expenses are permissible deductions for businesses. Therefore, salaried employees should not be deprived of standard deduction from their salaries when other entities are eligible for deduction of expenses incurred for earning their income.

Medical reimbursements: Medical expenses of up to Rs 15,000 reimbursed by the employer to the employees for medical treatment of employee or his family member is tax-free. Accordingly, employee ends up paying tax on any sum reimbursed over and above Rs 15,000. With increasing healthcare costs, the existing tax free limit of Rs 15,000 should be suitably increased.

Transportation expenses: The transportation allowance granted by the employer to his employee for commuting between the place of work and residence is tax-free to the extent of Rs 800 per month. This limit was fixed way back in 1997, and definitely needs to be revised upwards with due reference to the current cost of various modes of transportation.

Fringe benefit tax on employee stock options: Employee stock option plans, popularly knows as ESOPs, were brought under the net of fringe benefit tax (FBT) by the Finance Act 2007. FBT provisions under the act provide that employer can recover FBT on ESOPs from employees. Accordingly, employees are burdened in an unjust manner since FBT could be recovered from them by the employer. Further, employees also have to shell out tax on short-term capital gains arising on sale of such shares. Given the stock market condition today, in addition to burden of FBT recovery, ESOPs are no longer an attractive tool for compensation and employee retention. Therefore, it is recommended that FBT on ESOPs should be withdrawn.

Support common man by providing additional benefits related to housing: Housing is a basic necessity for the common man. Rising property prices and high interest rates in the past few years have made affordable housing a dream beyond the reach for most people. Therefore, it is essential to make housing affordable and an attractive proposition for a common man.

An increase in deduction for interest on loan taken for acquisition of self-owned property from the present limit of Rs 1,50,000 will help stimulate demand for housing. Alternatively, this cap may be scrapped. Also, the deduction available under section 80C on repayment of principal amount of housing loan should be appropriately increased. This would also not only encourage investment in the real estate sector but will also make buying a house relatively affordable.

Enhancement of deduction under section 80C: The government should further consider an increase in the aggregate deductible limit under section 80C from Rs 1,00,000 to Rs 2,00,000 – this will encourage long-term savings by taxpayers and also enhance availability of low cost funds for the government to meet its long-term development needs. Also, many more tax-exempt investment avenues should be introduced to mobilise funds for infrastructural and overall economic development.

Cherishing senior citizens

The age limit of 65 years for being eligible for higher exemption limit of Rs 2,25,000, should be reduced to 60 years, which is ordinarily the retiring age limit. In other words, all those who have attained the age of 60 years and above should be treated as senior citizens for income tax purposes.

Also, given the fact that senior citizens do not have a regular income stream and their income ordinarily consists of bank interest etc, restoration of section 80L (which provided for deduction of up to Rs 12,000 in respect of interest on certain securities) would be beneficial.

Source: utvi.com