Budget 2017 An Opportunity To Change Taxman's Perceptions

The Union Budget 2017 is eagerly awaited and likely to be path-breaking. Moving the day of presentation from the last day of February to the first day of the month and merging the Railways Budget into the Union Budget brings an end to age-old traditions. The Budget also follows the bold step of demonetisation, which among other objectives purportedly aims to identify honest and dishonest taxpayers.

This is reason enough to expect some sops on personal taxation, especially the tax rates and exemption limits. Demonetisation has brought enough buoyancy to the government treasury to incentivise the common man for his support, despite hardships endured. Slab rates of tax amended by the Finance Act of 2014 haven't been revised since. Given the rising level of income and inflation, the expectation to double the tax slabs may not be out of place. The basic exemption limit could be increased to Rs 5 lakh, with 10 per cent being applicable for income between Rs 5 lakh and 10 Rs lakh, 20 per cent for income between Rs 10 lakh and Rs 20 lakh and 30 per cent for income beyond Rs 20 lakh.

Although India has a population of 133.49 crores (source: worldometers.info), it has only 3.91 crores (source: incometaxindia.gov.in) Return of Income or RoI being filed, of which 90 per cent are individuals. In other words, less than 3 per cent of the population resorts to tax filing. This huge adverse ratio has been a major cause of concern. Simplification, including rationalisation of tax laws, exemption limits, a low tax regime, and a people-friendly administration could be the only way to improve this ratio. Alongside broadening the base, deepening it is equally important, particularly when we have only about 48,000 reported 'crorepatis'. Lowering the highest personal taxation rate to 25 per cent, which incidentally is the target corporate tax rate committed by Finance Minister Arun Jaitely in his Budget speech of 2015, could be the right move.

The following exemptions/deductions are now dated and insignificant, given the current economic situation. These are worthy of reconsideration:

• Children education allowance exemption of Rs 100 per month per child
• Children hostel allowance exemption of Rs 300 per month per child
• Free food by employers in the office premises or pre-paid meal vouchers of up to Rs 50 per meal

The above allowances generally are not part of the compensation structure, as the time, effort and cost of administration is more than the quantum of exemption. A standard deduction linked to number of children could be a better approach. Else, the current exemption limits should be increased to make it an effective tax incentive. One may not get a good meal in metros/B-Towns for Rs 50. This limit may be doubled.

Certain deductions/exemptions requiring rationalisation are as follows:

1) The average spend on medical consultation, diagnostics or medication required without hospitalisation but not covered under insurance is very high. The current exemption limit for medical reimbursement of Rs 15,000 (not amended for about 18 years) by employers isn't sufficient. This should be raised to Rs 50,000.

On the other hand, the government may consider increasing the taxable value of motor car perquisite, generally availed by mid to senior level executives but currently taxed at a very nominal value.

2) Demonetisation has affected the real estate sector. Banks are doing their bit by offering reduction in the lending rate on home loans, but interest eats up big portion of the EMIs during the initial years. Currently, home loan interest is eligible for deduction of up t0 Rs 2 lakh per annum on self-occupied property. It should be increased to Rs 3 lakh.

An additional deduction for home loan interest of up to Rs 1 lakh was introduced in 2013 for two years only for promoting housing for the lower income segment and subjected to certain conditions. It was reintroduced in financial year 2016-17 limiting the deduction to Rs 50,000. One such condition is that the home loan should have been sanctioned in FY14 or FY17, respectively.

Some who otherwise qualify missed out on this exemption only because their home loans had not been sanctioned in the specified financial year. This should be rationalised to extend it for all.

Most people are apprehensive of the taxman and avoid any interaction for fear of being harassed. As the 'Chanakya Neeti' states, it is important to collect tax without hurting taxpayers. The government has started recognising taxpayers via certificates of appreciation. Apart from this, they may consider awarding a tax rating based on consistency of tax compliance and not subjecting those with good ratings to tax audits. This may go a long way in changing the perception about the taxman and as a result, help in broadening/deepening the tax base.

(Ravi Jain is executive director-personal tax at PwC; Uma Vijayan, manager, PwC, also contributed to this article)

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