Its budget time once again and the common man is waiting anxiously for the finance minister to step in and curb soaring prices that are straining his domestic budget. Though tax reforms may not be the best instrument for combating inflation, the common man is looking forward to having more cash in his hands by way of a reduction in taxes.
With the abolition of fringe benefit tax (FBT) and re-introduction of perquisite valuation regime, the burden of taxes on fringe benefits has once again shifted to the salaried tax payer. Tax reforms could help in placing more cash in the hands of salaried employees if certain deductions / exemptions are introduced and the prevailing deductions/ exemption limits are augmented.
An increase in the minimum tax exemption limit by at least R1 lakh across the board would provide relief, especially to retired senior citizens and the relatively lower income groups.
Progressive tax rates that begin with a tax slab of 5% will reduce the tax burden on the low income group while simultaneously widening the tax base.
Unlike in case of income from business, against which various deductions are available, there is no relief available for the salaried class. The salaried taxpayer pays tax on his entire gross salary.
The standard deduction which was allowed as a reduction from taxable salary in the past should be reinstated. A deduction of 30% of salary or R1 lakh whichever is lower, can be considered.
The limit of Rs 1.5 lakh for deduction in respect of interest on housing loan was introduced in fiscal year 1999-2000 and tax payers have been making the most of this provision for over a decade. However, time has now come to revisit the limit considering that the home loan interest rates are on an upward spiral. This measure would have a two fold impact of not only reducing the taxable income of an individual but also boosting demand for the housing sector.
Deduction under section 80C which is one of the few tax saving tools available to a salaried taxpayer includes investment for Provident fund, PPF, LIC, Housing Loan repayment, expenditure on children’s education, etc.
This deduction is immensely popular among the salaried class and an increase in the current limit from Rs 1 lakh to Rs 3 lakhs will be a welcome measure.
Extending the list of eligible tax saving investments to include investment in IPOs will give a further boost to the capital markets. A deduction is available under section 80CCF of Rs 20,000/- paid or deposited as subscription to notified long -term infrastructure bonds.
Admittedly, the country is in need of massive funds for its infrastructure development programs. The tax payer would be more than happy to contribute a higher amount to the country's infrastructure development if this brings him a savings in his taxes. Hence it is recommended that the limit of the deduction be increased from Rs 20,000 to Rs 50,000.
The exemption for Transport allowance granted to an employee is currently is a meagre sum of R800 per month. The rising fuel prices warrant a hike in the exemption limit to at least Rs 4,000 per month.
Free food and non-alcoholic beverages provided during working hours at office/non- transferable vouchers usable at eating joints of Rs 50 or less per meal are not considered as taxable perquisites in the hands of a salaried taxpayer.
Considering the galloping food prices the same deserve to be increased to at least R100 per meal.
Homi Mistry is a Partner with Deloitte Haskins & Sells (DHS). The views expressed in this article are personal.