Two years ago, in July 2019, finance minister Nirmala Sitharaman presented her maiden budget — and the first Budget of the second term of the NDA government. In that Budget, she hiked the standard deduction for salaried employees to Rs 50,000 from Rs 40,000.
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The standard deduction is an amount that is deducted from an individual’s salaried taxable income, thus reducing the taxable income. Clearly, if the government wants to put more money in the hands of the taxpayer (as it may need to in order to boost demand that has been choked by Covid-related lockdowns), a substantial increase in the standard deduction makes sense.
Except that the finance minister, in the Budget presented in February 2020, had eliminated the standard deduction for taxpayers who opted to enter a new tax regime where lower tax slabs were offered to those who forgo the standard deduction and a host of other exemptions. These tax slabs are 5 to 10 percentage points lower than the older slabs — at the lower end of the income scale. At the higher end (income of Rs 15 lakh plus), the tax rate remains the same.
Tax mavens have discussed the new scheme at length, and see it as the government’s first, exploratory move into a no-exemption regime. Is this fair to salaried employees?
In an article written in June 2019 by EY, it was made clear that income-tax rules seem skewed against salaried employees. While businesspeople and consultants can claim exemptions against all kinds of expenses every month, salaried employees have far fewer options. Tax is deducted at source by the employer, significantly reducing take-home pay.
EY also offered a hypothetical case of a salaried employee and a consultant. Both make the same gross income of Rs 30 lakh, one as salary and one as fees. Post tax, however, the story is vastly different. The salaried employee pays Rs 6.73 lakh in taxes. The consultant, meanwhile, pays Rs 2.18 lakh. The salaried employee takes home Rs 4.55 lakh less than the consultant.
The finance ministry disagreed with this reading. In a written response, the ministry said: “The tax paid on taxable salary income and on gross amount of professional receipts cannot be compared as the taxable income in case of professionals is computed after allowing all the expenses incurred for carrying-out the profession. These expenses include rent for office space, salaries & wages of employees, electricity expenses for the office, printing & stationery etc.
However, in respect of a salaried individual, there is no requirement to maintain any office and the office expenses are borne by the employer. The only major expenses required to be incurred by a salaried individual for earning salary income is the expense incurred for commuting to the office. For this purpose and other miscellaneous petty expenses which a salaried individual might have to incur, a standard deduction is allowed to the salaried taxpayer which is currently Rs. 50,000.”
The purpose of the EY piece was not to question the expenses legitimately allowed to professionals. Rather, it was to highlight the fact that salaried employees had very few options to claim equally legitimate expenses. Now more than ever, people are working from home and are using computers and phones for official work. But they are not allowed to claim even a part of what they spend on buying such equipment as deduction from income. Some countries, such as Denmark and South Korea, allow such deductions to salary earners, and this is something the government could seriously consider now that ‘work from home’ is not just accepted but necessary.
The few deductions that are allowed to the salaried are unrealistically lower than the actual cost of the services. For instance, the limits for children’s education allowance (Rs 100 per month per child, up to two children) and hostel allowance (Rs 300 per month per child, up to two children) were last revised almost two decades ago.
The government’s claim that standard deduction of Rs 50,000 will take care of incidental expenses rings somewhat hollow. EY said the re-introduced standard deduction subsumed the tax-exempt transport allowance — an annual figure of Rs 19,200 and the medical reimbursement that could be claimed up to Rs 15,000. In short, the end benefit was just an annual incremental net reduction in taxable income of Rs 5,800.
Now compare this to what a professional can claim. For starters, there’s the presumptive tax scheme. Under this, professionals can file their return declaring 50% of their gross returns (subject to gross receipts not exceeding Rs 50 lakh). After the tax-saving investments under Section 80 are accounted for, the professional needs to pay tax only on the balance income. Of course, receipts in excess of Rs 50 lakh will need to be audited and the actual expenses as per the audited accounts are allowed as a deduction.
While presumptive tax has really helped smaller and medium-sized professionals, it has resulted in stark disparity between salaried employees and consultants with the same income.
The finance ministry disagrees, and says that in the case of presumptive tax, “it is presumed that 50% of his gross receipts are expended towards various expenses required to be incurred for carrying out his profession. However, this is not a standard deduction and it has also been provided in the Act that if the professional incurs expenses less than 50% of the gross receipts, then he has to declare the higher income.”
The previous finance minister, the late Arun Jaitley, saw this in a different light. In his 2018-19 budget speech, Jaitley highlighted the fact that an average salary earner pays three times more income tax (Rs 76,306) than a non-salaried taxpayer does (Rs 25,753) — both figures from the budget speech.
It will be interesting to see how the finance ministry deals with the issues of presumptive tax and standard deduction in a year when almost the entire country worked out of home. The pandemic-induced lockdown and subsequent restrictions on movement meant that salaried employees and professionals alike spent on office infrastructure at home. This new normal is unlikely to vanish in a hurry. Will the upcoming Budget take this into account when framing the new tax rules?
(A version of this article was published in July 2019)