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Your Money

india Updated: Feb 18, 2007 21:55 IST
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Rs 1 lakh=Rs 82,500?

The tax break investments you can make under section 80C have been reduced from Rs 1 lakh to Rs 82,500. The reason is that a lakh of rupees (or any amount, for that matter) isn't what it used to be. Except when it comes to making investments that qualify for a tax rebate. Prices rise, incomes rise and the value of the rupee falls, bit by bit, every day. The government measures these things with a great deal of apparent precision. It also adjusts many things based on this constantly sliding value of the rupee against its own past value. It's own employees' salary, for example, gets enhanced periodically by the addition of the quaintly named 'dearness allowance'.

However, in the area of personal income tax, such automated adjustments are almost never done, something which creates a clear disadvantage for the tax payer. In a few weeks, most of us will finalise our tax-break investments, which are limited to Rs 1 lakh each year. Last year too, this limit was Rs 1 lakh, and the year before that too. Before that, the structure was different but the total limit was still the same. For four years now, prices have gone up, incomes have gone up and the rupee is worth around 20 per cent less. However, the maximum tax break investments you can make is stuck at the same Rs 1 lakh.

Even by the official inflation rate, compared to four years ago, your tax break investments are worth only around Rs 82,500. This is unfair, to say the least. And it's all the more unfair because the principle of automatic indexation of taxation to inflation is not alien to the tax laws of our country — it is something that the government already does (and has done so for a long time) in the case of long-term capital gains. I know capital gains are conceptually different from tax break investments but the fact remains that if you are, for example, a long-term investor in the stock markets then the government will charge you less tax based on the fact that the rupee is worth less every year. However, this privilege is not extended to ordinary tax breaks.

In the last few days, there has been some talk of systematising tax slabs so that tax rates are not changed but only the tax slabs are revised upwards whenever the government thinks it appropriate. I think the government should move one step forward and link the revision of all tax-related slabs as well as the exemption and tax break limits to some inflation-related number that is formula-driven and thus independent of any arbitrary decisions. The actual tax each one of us pays is a function of many variables. Of these, only the actual taxation rate should be a variable that is decided by the government. The other inputs to this function should be transparent and predictable.

Unfortunately, something tells me that such a system is somewhat unlikely to be actually implemented. The current system, in which the government has many variables to tinker, makes it much easier to enhance real tax revenue while maintaining appearances of actually doing something else. However, let's see if we move at least a little bit towards a transparent and fair system of revising limits.

The writer is CEO, Value Research India Pvt Ltd

Email Dhirendra Kumar: dhirendra _kumar@valueresearchonline.com

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