N K Singh, Member, Planning Commission, has chaired a committee comprising members of the Central Board of Direct Taxes (CBDT) and others to consider the extent to which the Shome Committee recommendations can be implemented in this years Budget proposals in the back-drop of falling direct tax revenue.
The first relevant issue is whether sufficient data and information was available with the N K Singh Committee or CBDT on the quantum of revenue which the exchequer sacrifices in respect of each rebate or exemption availed of by individual tax payers. Hopefully, specific data may have been available to the committee for arriving at an appropriate decision, though such information is not in the public domain.
There is no denying the fact that the main object of taxation is to collect revenue for the larger public good. Other countries of the world, specially some European ones, have a personal rate of income tax which is much higher than the 30 per cent rate in India. However, the striking difference in the Indian context is the fact that the government provides no social security for the unemployed, the retired, the uneducated or those who are terminally ill. While education and medical facilities are available in the urban areas, the quality of both falls much below desired standards.
Schemes for the unemployed announced from time to time have only scratched the surface of the problem with substantial amounts not reaching the intended target population. Indians have, therefore, to provide for their old age, their medical needs, education of their children, and marriage expenses of daughters. In this environment, far from there being a stigma on tax evaders, such practice is socially accepted and approved in every strata of Indian society.
It is only in the case of the dwindling class of honest taxpayers who declare their income truthfully, that the question of claiming deductions, exemptions and benefits arises. The significant deductions available from the gross total income of an individual are summarised below:
* Contributions to certain pension funds of Life Insurance Corporation (up to Rs 10,000), subject to certain conditions Section 80-CCC.
* Medical insurance premia paid to General Insurance Company (up to Rs 10,000), subject to certain conditions Section 80-D.
* Deduction of Rs 40,000 where any expenditure has been incurred for medical treatment (including nursing), training and rehabilitation of a handicapped dependant or any amount is paid or deposited under any scheme framed in this behalf by LIC or Unit Trust of India Section 80-DD.
* Expenses actually incurred on medical treatment of specified diseases and ailments subject to certain conditions Section 80-DDB.
* Amount paid out of income chargeable to tax by way of repayment of loan or interest on loan taken from financial institution/approved charitable institution for pursuing higher education, subject to certain conditions (maximum deduction Rs 40,000 in a year: for a maximum period of eight years) Section 80-E.
* Interest on government securities, interest on NSC VI/VII Issue, interest on NSC VIII Issue, interest on notified bonds/debentures, interest on deposit under NSS, interest on deposits under Post Office (time deposits/recurring deposits) schemes, interest on deposit under PO (monthly income account) Rules, interest on bank deposits/deposits with financial corporation, etc. (maximum limit is Rs 9,000 with effect from assessment year 2002-2003). In addition, special deduction of Rs 3,000 is allowed in case of interest on government securities Section 80-L.
A perusal of these provisions highlights two important facts. First, a very small quantum of deduction is available to each taxpayer considering the level of investment he has to make. It is obvious that the lower the rate of tax, the less is the impact on the tax revenues of the government. Second, all the aforesaid benefits pertain to imperative personal needs, like medical, education, old age pensions, etc. By removing or reducing these tax benefits, there would be little impact on revenue collection, but it would leave a bitter taste in the mouth of honest taxpayers.
The next set of benefits are in the form of rebate under Section 88 of the Income Tax Act, which are restricted to Rs 12,000 per annum in most cases and Rs 16,000 p.a in certain specific cases. One school of thought is that savings need to be increased in India and, therefore, the rebate under Section 88 needs to be enhanced so that a person is eligible to claim the benefit of 20 per cent of the amount invested up to a limit of Rs 1 lakh p.a. This would mean that the loss of revenue can be quantified at a maximum of Rs 20,000 p.a per individual.
Further, this incentive needs to be rationalised by removing the rebate pertaining to repayment of housing loans, the reason being that no incentive should be given for creating a capital asset in the form of residential property which can be sold at any point in time. Of course, this incentive was given with a view to boosting the construction industry. The giving of tax benefit as a stimulus to the construction industry has rightly been criticised as an inappropriate measure. A reduction in excise duty on cement, steel, and other building materials would be far more effective in achieving the objective. But knowing the impact on excise collection, the government has taken the easy way out by giving an indirect stimulus in the form of tax rebate under Section 88.
Perhaps the finance minister may look microscopically at the exemption of interest on certain bonds under Section 10(15) of the IT Act. Full tax exemption is provided on post office savings account where the interest payable is 3+ per cent p.a, Public Provident Fund scheme (9.5 per cent p.a), Deposit Scheme for Retired Government Employees (8.5 per cent p.a). In respect of other schemes, the interest is exempt up to the limit laid down in Section 80-L. These investments are generally made by professionals and entrepreneurs who have no other means of savings as in the case of employees who have retirement benefits in the form of provident fund, superannuation fund, gratuity, leave encashment, retrenchment or voluntary retirement compensation. The relevance of these provisions, therefore, continues unabated, considering the expectation of falling interest rates over the next 10 years.
Possibly one significant benefit which may be whittled down is the present unlimited exemption in respect of the 8.5 per cent relief bond issued by the Reserve Bank of India. The interest on these bonds may become taxable after February 28, 2002. The finance minister has, therefore, four options:
* retaining the exemption of interest, but up to a limit of, say, Rs 2 lakh per individual; or
* exempting interest on a percentage of capital investment every year by each individual or Hindu Undivided Family; or
* placing a limit on the amount which can be saved every year by each individual or Hindu Undivided Family; or
* removing the exemption completely but taxing such interest at a concessional rate of 10 per cent, the full amount being withheld at the time of payment annually.
The amendment could have different permutations and combinations with the rate of interest being reduced from 8.5 per cent to 7.5 per cent.
It appears that the Relief Bonds will bear the brunt of the finance ministers axe on exemptions in this years Budget proposals. However, he would do well to keep in mind the need of citizens to save the maximum amount during their working life, dictated by three significant factors in an uncertain environment emanating from the following: First, job insecurity and falling employment opportunities as a result of business downturn, company re-organisations and closures; second, fall in interest rates in the next 10-15 years bringing them on a par with rates prevailing in the free world; and, third, longevity of life as a result of the mapping of 90 per cent of the human genome which will result in significant strides in medical research, eliminating many of the common illnesses and diseases.
The finance ministers desire to raise more revenue has to be in sync with the need of millions of taxpayers who wish to perform their duties as citizens. Savings are not only for the benefit of the individual but form the bedrock of a nations long-term investment need of setting up a huge infrastructure which is part of the big-bang policy of the government to spur economic growth to a level of 8 per cent per annum.