Tax Rebates

Presently the rebate under Section 88 is available on investment up to Rs 60,000. In addition investment up to Rs 10,000 in approved infrastructure bonds qualifies for rebate. There has been a significant shift into small savings schemes such as public provident fund and deposit scheme for retiring employees. The recent cut in interest rate does not seem to discourage rise in such small savingsschemes. It is suggested that rebate on investments in PPF, Life Insurance premium and other small saving schemes be restricted to Rs 50,000 and limit for investment in approved infrastructure bond be increased to Rs 30,000. Thus total amount qualifying for rebate under Section 88 is Rs 90,000. The rate of rebate may be increased to 25 per cent.

Exemption for leave encashment Section 10AA of Income Tax Act

The income tax department continues to tax encashment of privilege leave at the time of resignation or termination of employment other than normal retirement as salary income though there are various court judgments exempting leave encashment as stated above. This results in avoidable litigation on the issue. A suitable clarificatory amendment should be made in the section to give effect to various high court judgments.

Education allowance Section 10(14)

Education allowance is deductible to the extent of Rs 50 per child. It is suggested that the limit be raised to Rs 500 per child ascosts of education have increased considerably. The allowance be restricted to two children.

Taxation of capital gains

In the case of individual or Hindu undivided family (HUF), the long-term capital gains are taxed at a flat rate of 20 per cent. The rate is applicable on the entire capital gains. Certain deductions allowed were withdrawn. It is suggested that there should be threshold limit of Rs 20,000 up to which capital gains are exempted. Thereafter any capital gains beyond the above limit may be taxed at 20 per cent.

Investment in certain new shares

The domestic capital market is in dire states. The steps be taken to motivate investors to invest in primary markets. It may be mentioned that earlier Section 80CC of the Income Tax Act provided for deduction in computation of tax payers total income by an amount equal to 50 per cent of the cost of equity shares forming part of eligible issue of capital. The government may seriously consider reviving above provision to give boost to theprimary capital market. If need be the government may restrict the relief under above provision to Rs 50,000 so that amount qualifying will be Rs 25,000 only.

The Companies Bill has provided for issue of sweat equity of issue of shares to employees at discount. The Central Board of Direct Taxes (CBDT) has not yet issued any statement regarding tax treatment of such shares in the hands of employee. The Securities & Exchanges Board of India (SEBI) is required to issue guidelines in respect of issue of such shares to employees.

It is suggested that the year in which employee exercises his option and subscribes to share, the difference between market price and price at which shares are issued to employee, as per guidelines if any prescribed by SEBI, and as approved by shareholders of company, be treated as perquisite in the name hands of employee and liable for tax. An employee selling shares should be liable for capital gains tax in the same year, if any, subject to facility of indexation. Further the costof acquisition of such shares should include tax paid by employee on perquisite value.

Tax laws

The judgments of jurisdiction high courts are accepted as binding by Commissioners of Income Tax Appeal. Strange as it may appear the Commissioners of Income Tax (Appeals) do not follow the jurisdictional Income Tax Appellate Tribunal's decision on the ground that they are not bound by it. This results in avoidable hardships to the assessee. The Supreme Court has held that the lower appellate authority should respect the decisions of higher Appellate Tribunals in the interest of smooth administration of justice.

With the trends towards globalisation, it is necessary that the country's taxation system is also brought in line with tax systems prevailing in other advanced countries with which we have close economic relations. It is essential that the government comes out with a long-term fiscal policy statement to outline the basis of future tax reforms. The need for stability in tax system is wellrecognised. Frequent changes in tax laws lead to uncertainty, avoidable tax litigation, and instability in the tax administration and consequent harassment to tax payers. Besides it discourages voluntary tax compliance. Tax laws should be stable at least for five years so that business and industry cans plan their activities taking into consideration tax implications. The success of any tax policy is dependent on tax administrators. The Dr Challiah Committee has made several recommendations which need to be implemented.

The author is a Mumbai-based chartered accountant