“Aam Aadmi ke badhte kadam; Har kadam par bharat buland”. This is the Congress party manifesto for the common man. In this backdrop, it remains to be seen whether the government be able to take measures to improve our purchasing power, which in turn provide the much needed stimulus to reverse the current economic slowdown.

There have been speculations about the measures that the government is likely to introduce to battle the slowdown. Lok Sabha elections 2009 manifesto of the Congress party points out that the focus of the new measures will be to stimulate demand in the domestic economy and to ensure that there is more purchasing power for the people and more liquidity for the companies.

One of the suggested methods to resolve the recession and increase the purchasing power of the masses is to introduce personal income tax reforms. This would be in line with changed taxation policies, which are followed by most governments worldwide to beat slowdown, and recession that set in following global financial turmoil.

Some of the key personal tax reforms that the government could consider, that would go a long way to stimulate demand and will provide a much needed boost to the economy are listed below:

Broad based tax structure

Every instance of enhancement of taxable limit has resulted in better compliance besides increased collections.

The Finance Act 2008 raised the individual threshold limit to Rs 1.5 lakh; and to Rs 1.8 lakh and Rs 2.25 lakh for women and senior citizens respectively. The maximum rate of 30 per cent was made applicable over an income of Rs 5 lakh, with suitable adjustments in the income slabs in-between. While these positive initiatives have caused increased disposable income in the hands of individuals, these have not gone far enough and may need further rationalization. The maximum rate of individual income tax in India is 33.99 per cent (including surcharge and education cess), which is on the higher side as compared with those in other countries. Also, the peak rate in other countries is attracted at a significantly higher income slab, as also the threshold limits in such countries are much more.

Thus, the government may consider cutting the peak personal income-tax rate by 5 per cent, which may be made applicable on an income slab of over Rs 10 lakh. Further, the basic exemption limit may be raised to Rs 2.5 lakh. This, it is felt, will boost consumer spending and revive the economy.

Benefit for salaried employees:

Standard Deduction

The provision of standard deduction, which was given to employees to compensate for the incidental expenses incurred by them in connection with employment, such as conveyance or fuel, was discontinued by former finance minister P Chidambaram with effect from April 1, 2006. In an attempt to put more cash into the pockets of salaried class, the government may consider bringing back standard deduction. This may marginally impact tax collection but will boost consumer spending and thus indirectly contribute towards tax collections.

Medical expense reimbursement by employer

Current tax provisions prescribe a monetary limit of Rs 15,000 for reimbursement by employer of medical expenses incurred by employee on himself and his family. The reimbursement beyond the said limit is taxable in the hands of the employees. The Finance Act 1997 has increased the limit to Rs 15,000 from Rs 10,000 with effect from Financial Year 1998-99. As cost of healthcare is increasing day by day, it is felt that the monetary exemption limit be increased to at least Rs 30,000 per year.

Children Education / Transport Allowance

The provisions governing taxation of salaries have a few attractive but measly deductions, such as children education (Rs 100 per month per child with a restriction to two children), children hostel (Rs 300 per month per child with a restriction to two children), transport allowance (Rs 800 per month), and so on. The expenses actually incurred in respect of above have increased manifold in past few years. These limits are definitely not in tune with market rates. In case the transport allowance is marked-to-market, the deduction could well be around Rs 2,000 per month.

Education costs are nowhere near the exemptions being given, which calls for their revision.

Deduction under Section 80C for various investments

Section 80C provides for deduction in respect of investments in designated avenues like life insurance, deferred annuity, provident fund, subscription to certain equity shares up to a maximum limit of Rs 1 lakh. Given that the government is looking at mobilization of funds for the infrastructure sector, which remains a critical constraint for the future growth, the government may increase the limit of deduction available under Section 80C from Rs 1 lakh to Rs 2 lakh with a condition that Rs 1 lakh should be invested only in securities of companies belonging to the infrastructure sector.

Investment under pension schemes

At present the deduction under Section 80CCC, for contribution to pension schemes, has been clubbed with in the overall limit of Rs 1 lakh under Section 80C. Pension addresses a special need – the provision for post retirement income and it cannot be compared with the other tax saving instruments which are general in nature. Thanks to the advancement in medical research, the longevity of the population has increased and hence the need to provide for old age. Thus, deduction under Section 80CCC should be made independent of Section 80C, since tax incentives still continue to be the driver for investment in pension schemes. Moreover, on maturity of the pension scheme there should be full exemption available to the investor. In short, the EEE (exempt, exempt exempt) model which applies to provident fund etc, must also apply here.)

Gifts provided by the employer

It is customary in India, as it is in other parts of the world to provide gifts to employees as a token of recognition for their achievement/performance or on occasions such as birthdays or marriage anniversary or on festivals like Diwali and Christmas. However, levy of Fringe Benefits Tax (FBT) has acted as a deterrent on employers in providing gifts to employees. Further, there is an anomaly in the current provisions of the tax laws wherein an employer liable to pay FBT is charged the same irrespective of the value of gift made to its employees. However, in case the employer is not liable to pay FBT, gift made to the employees below Rs. 5,000 in aggregate during a year is neither taxable in the hands of the employee nor chargeable to FBT in the hands of the employer. Thus, it is suggested that that the provision of gift by employers of less than Rs. 5,000 in aggregate during a year should be exempt from FBT. This is but just an illustration of the hardship that FBT is causing. Such hardship must be mitigated.