Wednesday, February 17, 2010

Will Budget 2010 have respite for the 'Aam Aadmi'?

The Aam Aadmi's expectations from Budget 2010 are high given the ever rising inflation and wholesale price index (WPI). An appropriate increase in the income tax slab could probably cushion the impact of the increased inflation and WPI and could bring about some relief. An enhancement in the basic exemption limit to a realistic level would at least bring a small smile on the face of the common man!
As of today, self-employed people are better off than salaried employees as they are entitled to the deduction for expenditure incurred to earn the income, whereas there are no prescribed deductions available for salaried employees. Therefore, it is expected that this budget would at least provide for a standard deduction to cover certain expenditure.
Given the current scenario; difficulties increase for the employed class people due to double taxation in case of contribution to the retirement pension schemes. Employees would be paying taxes not only at the time of contribution (if contribution is in excess of Rs 100,000) to superannuation fund (which is approved by the income tax authorities), but also upon retirement. Hence, it would be prudent to tax such benefit only when they are enjoyed by the employee i.e. on retirement when pensions are received.
Further, certain exemptions are provided to boost social objectives or employee welfare or to meet the specific needs of the working group. However, in the present economic environment, the age old exemptions limits are inadequate and need a thorough make over.
Some of such exemption limits, which are historical and should be enhanced to a more practical limit keeping in mind the current economic environment and the inflationary pressure are listed below:
• Exemption limit of Rs 100 per month for education allowance fixed in 1997; Exemption limit of Rs 50 for meal provided was introduced in 2001 i.e. around 8 years ago and no revision has been done; Exemption limit of Rs 800 per month for Transport allowance was fixed in 2001;
• Exemption limit of Rs 15,000 p.a. for domestic medical reimbursement;
• Exemption limit for Gratuity (payable on retirement) was fixed to Rs 350,000 in 1997, more than a  decade  ago.
Similarly, to encourage the saving and for channeling savings to the prescribed sector, deduction/relief from tax is given to the individual taxpayer on making investment in specified securities. Current deduction available from tax is restricted to Rs  100,000.  Such limit should be enhanced to Rs 300,000 as recommended in the Direct tax code.
Benefits arising to an employee on account of the employee stock option plan (ESOP) get taxed on allotment of the security without any realisation of cash rendering ESOP unattractive. In the past, Government has given the benefit of the qualified plan, which allowed employees to pay tax on realisation of cash. Such beneficial tax provisions should be restored.
Income Tax provisions should be more versatile to the needs of the expatriate employees and global compensation.  Most of the tax provisions tend to ignore global compensation and the matter is usually left to litigation that gets resolved only after several yeaRs  Some examples to consider are as follows:
• The Income tax act does not contain any provision for the Hypothetical tax deducted by the employer resulting into overall reduction in entitlement to the compensation. Therefore, deduction on account of the hypothetical taxes is allowed only when it is appealed before the higher authorities. This increases the overall cost of the carrying on international business for foreign as well as Indian multinational companies;
• The notional taxable value of interest on loans (interest free or at a concessional rate of interest) taken by the employee from the employer is imputed based on interest rate of the state bank of India. Even in case where loan taken in foreign country at market rate from the employer, taxable value will be imputed based on SBI rate rather than benchmarking with market rates of interest of such foreign country. In order to remove such an anomaly suitable amendments needs to be incorporated;
• Exemption for the Leave travel assistance provided by the employer covers only travel fare in India while the employee is on vacation. It does not cover a situation where an employee if deputed abroad would find it impractical to take a vacation for travelling in India to avail the exemption. Therefore this exemption should also be extended to include foreign travel.
Similarly, deduction for interest on loan for self occupied house is currently restricted to Rs 150,000. Such limit should be enhanced to the appropriate level as housing loan has become more expensive making it practically impossible for the middle class group to acquire immovable property.
The above suggestions would be too insignificant to adversely affect the overall collections of the Government, but would definitely result in a perceptible relief to the huge middle class population in the country, which has been a significant contributor to the growth of the Indian economy over the past few years.