Sunday, February 10, 2013

Some Ridiculous Income Tax Provisions of India !

Income Tax or IT is a taxation tool in the hands of the Finance Minister of India Union to use against the Indians every year in the month of February during the secretive ceremonial presentation of the Union Budget in the Parliament.

I am not against the government taxing its citizens. After all that is what the governments are for !

But I am a bit confused and surprised at the manner in which it is done year after year.

Decades ago, the IT never used to be a major contributor to the national exchequer. It used to the the indirect taxes such as excise duty, sales tax, customs duty, etc on the goods. Later services used to be introduced in the tax net and now service tax has become a major contributor. Another new taxation idea that came up in the recent past is the value added tax or VAT.

When some of the irrational taxation stipulations in IT, for example the high rates as high as 90%,  were removed,  IT also became a major contributor to the national exchequer in the recent years. Perhaps, more and more people started giving the income tax, instead of evading it.

The highest income tax rate in India for some years has stabilized at around 33 % of the  taxable income of the individual or the corporate. The taxable income used to be different from the gross income because the former was deduced after giving some rebates and allowances in the latter.

Earlier IT rebate used to be  a long list. Those with a good knowledge of the loop holes of the tax system could use their knowledge to their convenience to get their tax liability reduced considerably. Income tax consultants thrived on this. Top officials of the government and top executives in some private industries used it well for their advantage.

For example perquisites or perks of the salaried class were not covered in the income tax. The private sector companies in many instances therefore used to pay their employees more in perks than in actual salaries. Cash awards received by individuals were another thing which was not taxed. If a high influential officer gets a cash award of say a few lakh rupees it used to be tax free !

However in recent years most of the perks became taxable. 
In this process tax authorities introduced some ridiculous provisions that make some of the employees of the Public Sector Undertakings (step children of the government !) in utter disadvantage as compared to their elite fellows in government service or private sector service.

For example, they introduced this concept that if any employee is given any accommodation by the employer then it is deemed as a perk having some value. Regardless of what the employer charges for the housing facility, the government introduced a ridiculous rule to calculate the value of the housing perk.

If the employee stays in any accommodation provided by the employer in a metro city, the value of the housing perk is 30% [ In tier two cities it is 20% and in cities of lower population it is 10%] of the basic salary. This value (not actually paid) is then added to the income of the individual and taxed as income tax.

Now let us see how this works out for three different people employed in Delhi.

First let us take three types of employees, A , B and C,  getting the same basic pay , say Rs.50,000/-

A is a government officer, B is a PSU officer and C is a private company officer.

If they do not avail the quarters provided by their respective employers both A and B can get 30% of their salary (Rs.15,000) as House Rent Allowance or HRA and for C it can be any thing as per his company policy. This HRA if availed will be taxed in this case at the maximum rate and effectively they get a net of about 10,000 in hand as net HRA. They might get a rented 2-3 bedroom flat in delhi by paying another 10,000 from their pocket. Or they can think of getting their own flat by taking a loan and the net HRA would help in paying their EMI to some extent. [Considering the cost of a 2 BR flat in Delhi at more than Rs 100,00,000/- it would be just impossible for these people to own a flat in Delhi with their income from salary alone! And that is another point to be noted !)

Now there is a possibility that A who is a government officer could get a decent quarters in Delhi. For B, the chances of getting a quarter from his government owned company depends on which company it is. For C, the company might get him a leased accommodation if it is a reputed one. In all these cases, the type of accommodation and the facilities that these three people get widely vary. If fortunate and well connected, the government officer might get the most spacious bungalow as his residential quarters having a potential market rent that is substantial. If not so lucky, both A and B might get some dilapidated substandard quarters some where.

But if they take the accommodation that is provided by the employer, regardless of its quality or facilities, the IT rules ridiculously stipulate that its perquisite value should be at 30% of their basic pay. Thus their gross salary is deemed as risen by Rs.15000/- per month and an IT of 5000/- per month drains out from their salary income. The government takes out Rs.5000/- from them as IT per month on account of them staying in a dilapidated 'sarkari' quarters !

Now  a person who happens to be provided with a decent well maintained accommodation, will not cry for this, perhaps. But that is not the case with  his colleague who is forced to live in a shabby dilapidated quarters paying the same tax on account of the housing provided by the employer. In reality a good majority of the employers, whether they are government departments, PSUs or private organizations or academic institutions, do not give much importance to maintain their townships and housing facilities that had been built up in the past decades. Any one travelling in India can well distinguish the employee quarters provided by these organizations because of the extreme neglect of these by the respective organizations ! 
It is quite possible that the government officers who assist the Finance Minister in preparing the budget proposals live in good government accommodations and are blind to the actual realities elsewhere !

Thus a person who opts for HRA gets Rs 15000/- per month in hand extra while the one who lives in a shabby accommodation provided by his employer gets poorer by Rs.5000/- per month. The disparity widens as all these calculations are done on the persons basic salary with no consideration whatsoever to the facility provided.

The best approach in this would be that all employers should give HRA to their employees and the employees should be allowed to choose the accommodation either rented or their own. The employers should offer the quarters by declaring their rents.

There are many more such ridiculous rules and stipulations that need to be rationalized.
For example the IT rebate for housing loan interest that is declared from time to time does not help any one considering the cost of housing as it stands today.

Education has become the costliest affair now in India as the government has washed it hands from that responsibility.

But it is more of a ridiculous insult when the government offers rebates to the tune of few hundred rupees to a person who spends thousands or lakhs as fees to educate his wards ! It is better that such rebates are not offered at all !

Self employed and business people are allowed to deduct depreciation of their cars and certain other items from their income while no such facility is available to the employed class. This makes the business people to change their vehicles every 5 years while their salaried fellows with equivalent incomes look on enviously with no such IT bonanza for them . Perhaps this makes some of them look towards other means of earning income by adopting corrupt practices !

There are many such ridiculous things in the Indian income tax rules that keep changing and swinging as per the whims and fancies of the Finance Ministers and their advisers.

I am just waiting to see what is in store this year !

[View the linked list of all Blogs of the Author Here ! ]


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