A Subtraction Which Needs Addition – Section 16(1) Of The I.T. Act, 1961 – Standard Deduction Of Salary Class

CA Prarthana Jalan has argued that though the salaried class of taxpayers pays taxes honestly, they have been given a raw deal by the Government. She claims that the removal of the age-old right to claim standard deduction is discriminatory and unjust and contrary to the prevailing international practice. She has pleaded that the Finance Minister should undo the injustice meted out to the salaried taxpayers by restoring the standard deduction in the forthcoming Budget

Will on 1st February, 2018, Hon’ble Finance Minister,Shri Arun Jaitely make an addition of a wrong subtraction done by his predecessor in The Finance Act 2005 which resulted in doing unjust with the most honest tax payers of our country, will be unwrapped in just few days after.

As per the statistics released by Income Tax Department, Only 1.7% Indians paid Income Tax in the A.Y 2015-2016. Net direct tax collections for April-September,2017 in the first half of the current financial year, grew 15.8 per cent from last year to Rs 3.86 lakh crore. The rise in direct tax collections was primarily driven by a 11.5 per cent growth in advance tax collections that were recorded at Rs 1.77 lakh crore up to September 30. Advance tax for corporate income tax grew 8.1 per cent year-on-year between April and September this year, while that for personal income tax rose 30.1 per cent. Personal income tax accounts for the major revenue receipts of the government of India and which comprises largely of salary class. But sadly, the Government’s have only worked to promote Industry or particular class of industry by way of incentive in taxes but it never rewarded or did justice with the salary class people who pays tax honestly. The salary class always pays tax to the government at the very point they earn their salary (TDS) and with full honesty without any scope of any evasion or avoidance as the employer always carry out this statutory duty with full sincerity and honesty.

But indeed the subtraction of The Finance Act 2005, when standard deduction on salary u/s 16(1) of the I.T Act,1961 was withdrawn, needs to be re-added to do justice with the salary class.

The main advantage with standard deduction was its simplicity. Since a lump sum deduction was allowed, there was no need for tax payers to keep proofs of expenses (like bills) and related documents. It made life easy for the I-T department also (i.e. no need to crosscheck whether the expenses claimed are genuine or not).

The erstwhile section of 16(1)which was repealed,read as under:-

“16. The income chargeable under the head “Salaries” shall be computed after making the following deductions, namely :—

(B ) exceeds five lakh rupees, a deduction of a sum of twenty thousand rupees;]”

The deduction of expenses for the salary class from their salary income was there in our Income Tax Act, since its very inception. Even under the erstwhile Act of 1922, it was present,which read as under

s. 7(2) of the Indian IT Act, 1922.

“The income chargeable under this section shall be computed after making the following deductions, namely:-

(i) any amount not exceeding five hundred rupees, expended by the assessee on the purchase of books and other publications necessary for the purpose of his duties;……………….”

By the Finance Act, 1974, With a view to simplify the assessment procedures in the case of salaried taxpayers, the Finance Act had substituted the separate deductions of expenses by a standard deduction in respect of expenditure incidental to employment to be allowed in the computation of the taxable salary.

Thereafter the said clause went through a lot of amendments by different finance acts and till its repletion it was as mentioned aforesaid.

But by the Finance Act,2005 it was withdrawan on a pretext that the basic exemption limit and sec 80C deductions are being increased and to have conformity with growing international practice.

In the budget speech, while withdrawing the deduction the then the Hon’ble Finance Minister had said:—

“Given the higher exemption limit and scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction“.

Ironically, since then the said deduction is no more available to the salary class while the limit of exemption income and sec 80C deduction was increased for one and all.

There are many countries across the globe like USA, Indonesia, Germany, Japan,etc which do give standard deduction to their citizens from the salary earned.

It is worth-while to note that our taxation system rests on the principle that, it is not the gross income which is subjected to tax, but the net income arrived at after deducting the related expenses incurred in connection with earning such income, that are made the basis of taxation. In the Income Tax Act,1961 there are 5 major heads of Income i.e Income from salary, house property, capital gain, Income from business & Profession and income from other sources.This principle of providing deduction of expenses is observed while taxing all other classes of incomes, viz., Income from Business & Profession (sec 28 to sec 37), House Property (sec 24 deduction), Other Sources (sec 57 deductions), Capital Gains sec 48) etc except Income from salary.

From the above, it can easily be comprehended that the Finance Act 2005 singled out the income chargeable under the head “Salary” to take away the deductions legitimately admissible for the expenses, which is wholly and exclusively incurred for earning the salary income. This is a clear case of deviation from the principle of equity enshrined in the Constitution and also the principles of taxation of income enshrined in the Income Tax Act which continues till its abolition in 2005. It was done on the basis of recommendation of Shome & Kelkar Panels(II). It was mentioned in the report that :-

“It is also well known that most employers provide extensive library facilities and reimbursement to senior employees for expenditure on books and periodicals. In fact, in the Government, the expenditure by senior officers on newspapers is reimbursed. In the case of the corporate sector, the expenditure on newspapers and periodicals is an allowable business deduction without being treated as a perquisite in the hands of the employees.

In addition, in the case of most salaried taxpayers, the valuation of perquisites continues to be vexatious. Therefore, the taxable base for employees is substantially lower than the real base.”

The reasons given by the Shome Panel and the two Kelkar Panels for the abolition of standard deduction were not having any cogent basis. Conveyance expenses and perquisites are not available to every class of salaried person. Their magnitude also differs. In today’s highly competitive world it is utmost important for a person to keep himself/herself update.Employees do purchase books, periodicals and journals. They join many online courses/distant learning programs. In this techno savy world, the employees also has to purchase many tech savy gadgets, laptops, mobiles, they have to subscribe to many websites, portals, platforms. They have to attend many seminars etc. Even the outward promp and show matters a lot. But they are not allowed to get deduction of the aforesaid expenses.

Salaried employees face another hurdle when it comes to reimbursement of claims. Most companies impose caps for reimbursement of expenses and even in Income Tax Act,1961 tax free limits for allowances which can be availed of by salaried employees are fixed by the government, which do not meet the parameters of the growing inflation.

Though a business class has right to decide that what expenses are commercially expedient for it but not a salary class. To avoid the hardship of proving the actual expenses the concept of standard deduction was brought in statue. Taking away this claim from the salary class is clearly discriminatory and unjust.

It is also pertinent to note that this standard deduction that was there in the statue was not a bounty to salary class but their right as salaried persons also spend a lot of money while performing their duties. They get their salary after deduction of TDS. They have to cope up with the inflation scenario and in many circumstances also fail to invest the full amount to get 80C Deduction.

So it’s a high time that the standard deduction which was wrongly subtracted from the Income Tax Act, is re-added.