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Insertion of section 88D hardly of much relevance
A new section 88D has been introduced by the Finance (No. 2) Act, 2004 for providing hundred per cent rebate of tax to an individual, whose income does not exceed rupees one lakh, with a provision for marginal relief. Examining this provision, the learned author is of the opinion that introduction of section 88D is ill-founded and is more a political gimmick than a rational economic measure. The introduction of such a provision is inconsistent with the attempt to widen the tax base.
||2. Justification for exemption limit
|3. Task Force’s recommendation
||4. Insertion of new section 88D
|5. Section 88D as finally passed
||6. Impact on senior citizens
|7. Impact on women taxpayers
||8. Impact on other taxpayers
|9. Dilution of tax base
There have been continuously increasing pressures on the Central Government to raise the exemption limit of income-tax to Rs. 1,00,000. The argument has been that higher exemption limit would compensate people against rising prices and people with lower income would get relief from income-tax burden. The Government has also yielded to such demands. The exemption limit was raised from Rs. 30,000 for the assessment year 1994-95 to Rs. 35,000 for the assessment year 1995-96, to Rs. 40,000 for the assessment years 1996-97 to 1998-99 and further to Rs. 50,000 from the assessment year 1999-2000 onwards. While Mr. Jaswant Singh did not yield to such pressures, Mr. P. Chidambaram seems to have yielded to such pressures, in a modified form, when he pronounced on 8th July, 2004 in his Budget speech for 2004-2005 that “No one with a taxable income of Rs. 1,00,000 will be required to pay any income-tax any more.” This pronouncement was very much hailed and many people thought as if exemption limit had been raised to Rs. 1 lakh. However, in reality things were different and the initially created impression has not proved correct.
- Justification for exemption limit
Theoretically, a certain minimum exemption limit is justified on several grounds. Firstly, since the cost of collection is much higher than the revenue yield for small income earners, it may not be administratively desirable and feasible to tax such persons. Secondly, the marginal utility of income for small income-tax payers is much higher than the marginal utility of income for higher income group people. Consequently, the marginal sacrifice in paying the tax is much higher for low income group people as compared to the richer sections. However, cost of collection is never the sole criterion for fixing the minimum exemption limit. The exact cut-off point of exemption limit has to be decided by each Government on the basis of its perception of the minimum income required to support a family, tax liability at the lowest levels, administrative cost of collection and compliance burden of the smallest taxpayers.
- Kelkar Task Force’s recommendation
The Kelkar Task Force, in its consultation paper, the final report and the report on how to achieve the targets of the fiscal responsibility statute, recommended that all individuals with an annual income below Rs. 1 lakh be fully exempted from income-tax. In the views of Vijay Kelkar, such increase in the exemption limit would help “reduce the tax burden on individuals, and particularly low-income groups.” The Task Force further observed that “currently, with per capita income in the country at about Rs. 25,000 per year, our proposal implies that an ‘average’ family of four would not pay any income-tax and thus meet their needs better.”
It is really surprising how Kelkar Task Force suggested an increase in the exemption limit, in spite of the observation made in para 4.17 of its final report (December, 2002) which reads as under :
“The exemption limit of Rs. 5,000 in 1973-74 is equivalent to Rs. 50,000 at current prices in 2001-02. However, the exemption limit was increased to Rs. 50,000 in 1998-99 itself, i.e., 3 years in advance. Therefore, the increase in exemption limit has outpaced inflation. Further, a survey of the effective exemption levels across countries indicate that the exemption limit in India is relatively high-thereby keeping out a relatively larger number of people outside the tax net. If the share of direct taxes to GDP has to be increased to internationally prevalent levels, it is equally necessary that the tax system is as broad based as in other countries.”
- Insertion of new section 88D in the original Finance (No. 2) Bill, 2004
The Finance Minister, Mr. P. Chidambaram, however, did not raise the exemption limit Rs. 1 lakh. Instead, as claimed by him in the Budget speech, “The method that I have adopted in somewhat novel. While everyone will file his return according to the current tax slabs and tax rates, and compute his taxable income and the tax payable, any one with a taxable income of Rs. 1,00,000 will have his income-tax liability automatically rebated.”
The new section 88D introduced by the Finance (No. 2) Bill, 2004 reads as under :
“An assessee, being an individual resident in India, whose total income does not exceed one hundred thousand rupees, shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent. of such income-tax.”
From the wordings of this new section, it is evident that :
(1) this benefit will be available only to an individual resident,
(2) this benefit will be available only to those individuals whose total income does not exceed Rs. 1 lakh but every individual whose income exceeds Rs. 1 lakh even marginally would be liable to be taxed at the rates specified in the Bill,
(3) no other person such as HUF, AOP, etc. would be entitled to receive benefit of this provision,
(4) no marginal relief would be provided for individual taxpayers whose income exceeded Rs. 1 lakh even by a small margin, and
(5) income is to be considered before allowing deductions under Chapter VIII.
- Section 88D as finally passed
The Finance (No. 2) Bill received the assent of the President on 10th September, 2004 in the form of the Finance (No. 2) Act, 2004. However, before the passage of the Bill, the Finance Minister introduced amendment in the Finance Bill because this section was vehemently criticised for not making a provision of marginal relief. The continuance of this provision without amendment, would have considerably increased the burden on individual taxpayers whose total income exceeded the limit of Rs. 1 lakh even by a small margin. For example, if an individual taxpayer had an income of Rs. 1.01 lakhs, his total tax liability (excluding proposed education cess) would have come to Rs. 9,200 whereas his income exceeded the limit of Rs. 1 lakh only by Rs. 1,000. This was obviously very harsh. It has always been customary to make a provision of marginal relief. At present, marginal relief is provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 8,50,000 is limited to the amount by which the income is more than Rs. 8,50,000.
However, the anomaly was removed before the Finance Bill was sent for the assent of the President. Hence, section 88D(b) was inserted as under :
“(b) whose total income exceeds one hundred thousand rupees and the income-tax payable on such total income (as computed before allowing the deductions under this Chapter) exceeds the amount by which such total income is in excess of one hundred thousand rupees, shall be entitled to a deduction from the amount of income-tax on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds one hundred thousand rupees.”
As there is no provision of marginal relief in respect of education cess, this provision implies that individual taxpayers with income up to Rs. 1,11,600 or so will gain by paying the entire income in excess of Rs. 1 lakh because in their case, payment of tax (including education cess of 2 per cent) will not exceed the income above Rs. 1 lakh.
- Impact on senior citizens
The new section 88D will have absolutely no impact in the case of senior citizens. Under section 88B of the Income-tax Act, an assessee who is aged 65 years or more at any time during the previous year, is entitled to get rebate from tax @ 100 per cent or Rs. 20,000, whichever is less for the assessment year 2004-05 and onwards. Further, rebate under this section is computed before allowing rebate under section 88, if any.
This implies that even without the benefit of section 88, the operative limit for senior citizens stands at Rs. 1,53,000. Further, under section 88, if the gross total income of such a senior citizen exceeds Rs. 1,50,000, he/she is entitled to tax rebate @ 15 per cent up to a maximum investment of Rs. 1 lakh (including investment in infrastructure). This means that if a senior citizen is able to invest up to Rs. 1 lakh in specified forms, he can get a tax rebate of Rs. 15,000 on such investments. The chances of availing this benefit have considerably increased because the Finance Act, 2002 has withdrawn the restriction that in order to avail tax rebate, the investment should be made out of the income chargeable to tax in the previous year in which such payment or investment is made. The benefit of this section 88, if availed in full, would raise the operative limit to Rs. 2,03,000. This operative limit is further increased if the senior citizen is a pensioner because he/she is entitled to standard deduction on pension under section 16(i) which is 40 per cent of salary or Rs. 30,000 (if such pension is upto Rs. 5 lakhs) whichever is less. This means that the operative limit may go up to Rs. 2,33,000 in such cases. Thus, the new provision of section 88D is virtually inoperative in the case of senior citizens.
- Impact on women taxpayers
Similarly, section 88C of the Income-tax Act has made a provision of tax rebate in case of women below 65 years of age. This section provides that every resident woman assessee below the age of 65 years is entitled to a rebate of income-tax @ 100 per cent or Rs. 5,000, whichever is less. Further, rebate under this section is computed before allowing rebate under section 88, if any.
This means that all those women who are 65 years or more are already entitled for benefit available to senior citizens. Those who are below 65 years of age are entitled for a tax rebate of Rs. 5,000. This makes the operative limit at Rs. 80,000 in their case. Further, this tax rebate is made before allowing rebate under section 88. Moreover, women employees having gross salary income upto Rs. 1 lakh are entitled for tax rebate @ 30 per cent under section 88 if salary income is upto Rs. 1 lakh and 20 per cent if gross total income is upto Rs. 1.5 lakhs. This would mean that if a woman taxpayer, having salary income upto Rs. 1 lakh saves an amount of Rs. 13,350 in the forms eligible for tax rebate under section 88 (which is very likely to be the case), the operative limit would become Rs. 1 lakh. If she happens to be a salaried taxpayer and thus entitled to standard deduction, the operative limit would be still higher. This, in effect, means that the insertion of section 88D will provide a maximum benefit of Rs. 4,000 to those women who are below 65 years of age and who belong to non-salaried class. Further, it is common knowledge that work participation rate for women in India, as per 2001 Census is 25.7 per cent and women constituted 14.8 per cent of the total organised sector employment in the public sector and 23.9 per cent in the private sector. Thus, the new rebate under section 88D is of very little relevance for women.
- Impact on other taxpayers
It would be evident from the foregoing analysis that the operative exemption limit of income-tax is much higher than the statutorily laid down exemption limit on account of the various exemptions, deductions and rebates available under the Income-tax Act. A number of exemptions are available under section 10 and deductions under section 80 of the Income-tax Act. Important among these are house-rent allowance [section 10(13A) read with rule 2A], any income by way of rewards [section 10(17A)], agricultural income [section 10(1)], value of leave travel concession [section 10(5)], interest from certain exempted securities prescribed in section 10(15), any income by way of dividend [section 10(34], etc. Some of the important deductions available under Chapter VI of the Income-tax Act include payment of premium for annuity plan of LIC or any other insurer up to Rs. 10,000 (section 80CCC), payment of medical insurance premium upto Rs. 10,000 (section 80D), deduction upto Rs. 50,000 in respect of expenditure incurred on medical treatment of dependent relative (section 80DD), donations to certain funds, charitable institution upto 100 per cent or 50 per cent as provided (section 80G), deduction in respect of interest income from approved sources upto Rs. 12,000 plus an additional Rs. 3,000 in respect of interest on any Central/State Government securities (section 80L), etc. These exemptions and deductions make the operative limit much higher. Further, as pointed out earlier, there is also a provision of tax rebate under section 88 for all taxpayers in respect of savings made in approved forms. Since every employee or self-employed person makes some compulsory/voluntary savings towards future plans, he/she can avail tax rebate under section 88. Thus, real benefit of introduction of section 88D will only be marginal.
- Dilution of tax base
An adverse consequence of the introduction of section 88D would be that the number of taxpayers would be considerably reduced. One of the important objective of tax reform measures has been to widen the tax base and increase the number of income-tax payers. The number of taxpayers during the five year period from 1997-98 to 2002-03 has gone up from 1,59,79,205 to 3,44,07,380—an increase of 158 per cent in 5 years. In absolute numbers, the number of taxpayers has increased by 1.85 crores. The Finance Minister has himself admitted in his Budget speech that “My proposal will give relief to 1.4 crore assessees.” This means that all the efforts made with much fanfare to widen the tax base will go down the drain on account of the insertion of section 88D which, in fact, would not yield desired relief to the taxpayers.
In conclusion, we may say that introduction of section 88D is ill-founded and is more a political gimmick than a rational economic measure. The introduction of such a provision, in our view, is inconsistent with the attempt to widen the tax base. We, in India, should cultivate the tax-paying culture. This would be possible only when low rates of tax are combined with low exemption limit. The wider tax base would also infuse a sense of pride among honest citizens and would make them conscious of how their money is being utilised. We think that instead of tinkering with the present exemption limit of Rs. 50,000, we should move towards smooth progression without caring for the number of slabs. Gradually progressive tax rates will also help in reducing prospects of evasion.