In the previous chapter we studied the impact of proposed tax rates and concluded it is more in favour of the rich and not for middle income group. A similar view has also been expressed by group of Senior Income Tax Officials in which they have stated “under the garb of providing long term stability in the tax regime, the tax code in fact would widen the rich-poor gap and create more economic absurdities”[BS.21/09/09]  In this chapter we propose to discuss the impact of the new code on the salaried persons who are the most efficient tax payers of this country.

Before we get into the intricacies of the New Code with reference to the salary income group, let us get the picture of how our income is to be taxed in future. Under the new code income will be computed under two heads namely “special source” or an “ordinary source”. The special sources of income are listed in the Fourth schedule and they are taxed at special rates mentioned in that schedule itself on the gross basis and no deduction will be allowed from these incomes. This is known as presumptive taxation. We will discuss about this later. All other incomes will be grouped under “ordinary sources”

The accruals and receipts relating to ordinary sources are further classified into following five heads:

  1. Income from employment (old name salary)
  2. Income from house property,
  3. Income from business (old name –income from business or profession)
  4. Capital gains,
  5. Income from residuary sources(old name – income from other sources)

The “total income of the ordinary sources” will be added with the ‘total income from special sources’ to arrive at the ‘total income’ of the tax payer.

Now we discuss about the computation of income from employment. “Income from employment” will be the gross salary less the “permissible deductions”. The income side of salary will include income by way of due or receipt basis whichever is earlier. It will include the value of perquisites and profits in lieu of salary.

The ‘permissible deductions’, which plays a vital role in calculating the net taxable income, will be the following:

  1. Amount of professional taxes paid,
  2. Transport allowance to the extent prescribed’
  3. Prescribed special allowance or benefit to meet expenses wholly and exclusively in the performance of duties, to the extent actually incurred,
  4. Compensation under voluntary retirement scheme,
  5. Amount of gratuity received on retirement or death,
  6. Amount received on commutation of pension: and
  7. Pension received by gallantry awardees.

So far so good and it sounds like existing provisions only; but the catch is only paragraph 7.4 which follows the above and read as “the deductions under d, e, and f above would be available only to the extent the amount is deposited in a “Retirement Benefit Account” or the “NEW PENSION SYSTEM TRUST”. The amount received from approved superannuation fund, which hither to exempted from income tax will henceforth will also be treated in the same manner”

As per paragraph 7.5 of the code, the amount deposited in the tax saving schemes during the period of earning is restricted to only four avenues namely, approved provident funds[GPF,EPF,PPF], approved superannuation fund, life insurance schemes and New Pension System Trust only. The accretions to the deposits in these accounts remain untaxed till they are withdrawn. At the time of withdrawal they are taxed on receipt basis at the marginal rate applicable to the assessee in the year of withdrawal.

Under paragraph 7.7 of the code, salary will now include, inter alia the following:-

(a) value of rent free or concessional accommodation provided by the employer irrespective of the fact whether the employer is Government or any other person,and the value will be determined in the same manner as presently applicable to employees of private sector.(b) The value of any leave travel concession,(C) Leave encashment on retirement or otherwise, (d) medical reimbursement,(e) value of free or concessional medical treatment provided by the employer.

From the above it is clear that no other deduction (for example HRA, LTA, Medical Allowance, food coupons etc) will be allowed and salary will be taxable without any other deductions. Now let us consider an example for bringing out the comparison between existing and new provisions.

Mr.A who is retiring on 31-03-2012, has following income. Basic 2,00,000; conveyance allowance 9600  HRA 108000; LTA-18000; Med.All.-15000; Food Coupons-5000; Children Educational allowance –upto 2 children- per child 6000p.a. for school fees and 36000p.a.for hostel accommodation totalling 84000; Total Salary-439600; he pays a house rent at his place of work in Chennai- 120000p.a. He also own  house in Madurai, recently built in which his parents and school going children are living for which he pays 15000 per month as EMI consisting of 160000 for interest and 20000 towards principal repayment. His retirement benefit will be (a) Gratuity 3,00,000 , (b)His contribution of SPF 350000; Employer’s contribution to SPF 300000; Super Annuation Scheme balance of 600000 which can be commuted up to one-third 200000; his leave encashment at retirement will be 2,00,000; his present tax liability and future under the code will be as follows.

Particulars

Under Present

Act Rs

Under New

Code Rs.

Basic salary

2,00,000

2,00,000

Conveyance allowance

9,600

Exempted under sec10(16)

9,600

0

0

House rent allowance

1,08,000

Deduction u/s10(10)13A

90,000

18,000

1,08,000

Leave travel concession

18,000

0

18,000

Medical allowance

15,000

0

15,000

Food coupons

5,000

0

5,000

Children educational allowance

84,000

Exempted portion for 2 child

9,600

74,400

84,000

Interest on Housing Loan

1,50,000

-150000

0

Gratuity( Withdrawn for daughter’s marriage)

0

3,00,000

EPF (withdrawn for daughter’s marriage)

0

6,50,000

Commuted value of superannuation (to repay HL)

0

2,00,000

Leave encashment at retirement (TO REPAY HL)

2,00,000

0

2,00,000

Total taxable salary

1,42,400

17,80,000
Total tax payable

NIL

2,40,000

The above example clarifies the impact of tax liability under new code. The important points are withdrawal of deduction for important expenses like House Rent, Children educational expenses, Leave Travel, Medical expenses etc. By withdrawing deduction for these legitimate and essential expenses, the middle income salaried persons will be worst affected by the new code. Every employee plans to fund for his children higher education or marriage through his retirement benefits. If this withdrawal is to be fully taxed two worst situation emerges- (a) Tax Rate on his other income also increases (b) these are his long term savings which suffer tax in a consolidated manner. When the employee save, the tax deduction he gets may be nil or even at lower rates. But when he receives the cumulative amount he is taxed at the highest marginal rate applicable to his total income. In what way it is justifiable?  Why not the Government apply tax on regular income of these schemes taxable every year but allow the maturity proceeds free of tax? That is to follow ETE method than EET method. The latter method is more harmful to the tax payers. These rigours of taxation will be more felt in respect of all those employees who are on the verge of retirement immediately after the implementation of the new code. It will destroy all their future financial plans. They will be paying a substantial amount of their retirement benefits and maturity proceeds of their life long savings which they must have planned for their future financial needs.

In this respect it is worthwhile to recall the observations of SENIOR income tax officials. Following are few extracts from their views as appeared in the Business Standard dated 21/09/09. “… the loss of tax revenue under new code may be 50,000crores per annum. Take the case of individuals, where extensive giveaways by widening the tax base has took place at the cost of taxing, superannuation benefits, leave encashment, leave travel, commuted pension, VRS compensation etc. With an estimated tax loss of Rs.55,000/-cr New Code is a disaster and that is precisely the reason why no estimates of the tax losses are provided in the code. According to the Economic Survey 2009, 60% of India’s population does not have income of even Rs.20/- PER DAY. In such a grave situation where 660 million mouths to feed, why should the Government forego Rs.1.2 Lakh from a person who is earning Rs.10lakhs.”

This is not the only situation arising out of new code, in the next article we will discuss how small investors who invest less than Rs.10lakhs in equity shares or mutual funds are paying more dividend pay out tax than they will be paying if the same income is allowed to be taxed in their own hands directly. The system of Dividend Pay out tax is a cover up for patronising the richest promoter shareholders of the country at the cost of small investors of this country. Small investors are made to subsidise the tax burden of the richest.

Authored by: CA. N. VENKATESWARAN,  B.Sc.,FCA.,ACS.,CAIIB.,AMIMA , Email: nvenkat32@hotmail.com

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