Bringing back Section 80C is retrograde

TAXING MATTERS

Economists have prescribed certain rules for tax policy makers. Chief amongst these are the rule of reason, the rule of relevance and the rule of robustness. Some of the proposals in Budget 2005 on direct taxes have not adhered to these well-established rules.

The rule of reason necessitates that a tax change is evaluated on what is proposed to be achieved and its effects on the taxpayers. The following proposals do not conform to this rule:

Denial of standard deduction to salaried employees on the premise that it is a personal allowance; its removal is in conformity with the international practice; and that the adjustment of tax brackets makes standard deduction unnecessary.

These grounds are against the rule of reason as standard deduction is not a personal allowance and is being given as a lump sum for meeting employment-related expenses.

In many countries, like Malaysia, Indonesia, Germany, the UK, Japan, France, Thailand, etc., allowance in the form of standard deduction is being allowed to salaried employees for expenses. Plus, the benefit of adjusted brackets is being given to all taxpayers, not just to the salaried employees.

Reviving Section 80C is a retrograde step. This section was omitted by the Finance Act, 1990 on the ground that it confers more benefits to higher income group taxpayers. Hence, Section 88 was enacted to neutralise this inequality by a tax rebate at 20 per cent on the value of specified investments. Why has it become necessary to bring back Section 80C and opt for the deduction method has not been clarified.

Continuing with the education cess and extending it to indirect taxes by way of health cess on cigarettes, gutka, pan masala, etc., is unjustified. The direct and indirect taxes are meant to provide funds for various needs of the country, including education and health and a separate cess is not justified. If this trend is not checked, then the country may end up having, apart from income-tax, manifold cesses""for employment, backward area development, rural development, drinking water, sanitation, housing, agriculture and the likes. Such cesses do not conform to the rule of reason.

Likewise, 10 per cent surcharge on income over Rs 10 lakh, and on companies, is against the rule of reason. Surcharge cannot be part of normal taxation policy. If more funds are needed, the rates should be hiked.

The rule of relevance is breached by the levy of 0.01 per cent charge on bank withdrawals. The finance minister has admitted that this levy is not meant to augment revenue but to check black money.

The purpose of this tax could be achieved by seeking information from the banks even without this levy. Such a measure shows the government's inability and frustration in not being able to check tax evasion. It is merely a subterfuge to show concern on issues relating to black money but the scheme has no relevance in this context.

The rule of robustness (stability) has also been breached. Enacting a provision to permit credit for MAT (minimum alternate tax) paid under Section 115JB""a benefit which was not available for Section 115JB"" by amendment of Section 115 JAA, without assigning any reasons, is against the rule of reason and stability. Change in depreciation rates for additional and normal depreciation also goes against the concept of stability.

Changes in tax laws need consolidated thinking in regard to: (i) what is sought to be achieved; (ii) how these should be achieved (or the implementation part); and (iii) what will be the impact of the changes on the existing social, economic and political set-up. Making ad hoc changes, without any planning, perspectives and perceptions merely leads to confusion and complexities in the tax law.

However, I feel happy to find that the following expectations from the Budget, mentioned in this column on the Budget day, have been fulfiled:

The Finance Bill has not been loaded with a number of amendments and changes relating to tax reforms and a separate amendment bill for this purpose is expected to be moved soon.

The basic exemption limit has been fixed at Rs 1 lakh instead of an indirect route of Section 88D. It would, however, have been more rational if the suggestion regarding tax slabs of (i) Rs 1,00,001 to 2,00,000; (ii) Rs 2,00,001 to 3,00,000; and (iii) Rs 3 lakh and above at 10, 20 and 30 per cent would have been accepted.

The suggestion for a comprehensive scheme for giving benefit of savings has been accepted.