Budget 2013: The Tricky tax rebate

[CA DEV KUMAR KOTHARI]

It was expectation that in view of high inflation during last four years honorable Finance Minister will increase substantially basic exemption limit for tax payers. However, this expectation has been totally belied. Honorable Finance Minister has however allowed a petty tax rebate of Rs. 2000/-  only to some of individual tax payers whose total income does not exceed Rs. Five lakh.

For such a petty rebate honorable Finance Minister thought it fit to mention the same in his budget speech also. His speech on this issue (vide para 125) reads as follows (with highlights and catch word marked red) :

           “ The rates of personal income tax have survived four Finance Ministers and four Governments. The current slabs were introduced only last year. Hence, I am afraid, there is no case to revise either the slabs or the rates. Besides, even a moderate increase in the level of threshold exemption will mean that hundreds of thousands of tax payers will go out of the tax net and the tax base will be severely eroded. Nevertheless, I am inclined to give some relief to the tax payers in the first bracket of `2 lakh to `5 lakh. Assuming an inflation rate of 10 percent and a notional rise in the threshold exemption from `2,00,000 to `2,20,000, I propose to provide a tax credit of `2,000 to every person who has a total income upto `5 lakh. 1.8 crore tax payers are expected to benefit to the value of `3,600 crore. 

The proposed provision is as follows (with highlights and catch word marked red):

Rebate of income-tax in case of certain individuals.

“87A. An assessee, being an individual resident in India, whose total income does not exceed five 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 or an amount of two thousand rupees, whichever is less.”.

Analysis:

In the speech it is stated “ I propose to provide a tax credit of `2,000 to every person who has a total income upto `5 lakh” .

As per proposed section there will be rebate (and not credit as stated in speech). Rebate will be allowed only to individual who is resident and not to every person, as stated in the speech.

Honorable Finance Minister is requested to check if there is mistake in the draft of proposed section 87A.

Reason for rebate:

Honorable FM has stated reason that an increase in basic exemption will take away hundreds of thousands of tax payers out of the tax net and the tax base will be severely eroded.

In case tax liability does not arise due to basic exemption a tax payer is not liable to file return of income. Whereas if tax liability is reduced to nil, due to deductions from gross total income or rebate from tax payable, then tax payer is required to file returns. It seems that honorable Finance Minister want that even marginal tax payers who have income above thresh hold limit but no tax payable due to rebate should file return of income, just to maintain tax payer base.

This shows lack of result orientation. Tax payer’s base is already due to PAN and other information. Just for tax payer base, it is not desirable to call for returns of income where there is no tax liability due to petty tax rebate of Rs.2000/-

Tax payers base is created by compulsory PAN, persons who have obtained PAN and who are liable to obtain PAN make a sizable tax payer base. Marginal tax payers are not a source of creation of data base. Therefore, the reason given by honorable FM seems not fully correct.

Here author would like to mention that tax payer base is created more by TDS, TCS and other data base created through information gathered in AIR etc. These tools need to be strengthened instead of asking tax payers to file return where there is no tax payable due to rebate of Rs.2000/-

Another reason given is that just last year basic exemption limit was revised. Last year basic exemption was revised from 180K to 200K. This was also meager increase in comparison to inflation which we faced in last five years.

Besides individuals all other tax payers also suffer due to inflation.

Therefore, thresh hold limit deserves to be increased for all tax payers. And rate of tax also need to be reduced to enable public of India to have more profit after tax and improved capital base.

Capital base- look forward:

Improved capital base will in due course increase income, savings and taxpaying capacity of public. On analysis of company results also we find that companies who have strong capital base by way of own capital funds available, strong technological and marketing base earn more, pay more tax whereas companies with poor capital base, have accumulated losses and are unable to pay tax.

For greater tax collection in future it is desirable that creation of capital and saving should also be considered for future requirements. Toward this end, more incentives should be allowed to small and marginal tax payers also so that they can improve capital base and pay higher tax in future.