Volume VII Part 6 June 25, 2014 3 Business Advisor

Shri Jaitley needs to be fair to the

salaried taxpayers and remove injustice

of withdrawing standard deduction by

Shri Chidambaram

T. N. Pandey

Salary-earners constitute a significant segment of

taxpayers in the country and pay substantial amount by

way of income-tax and education cess to the exchequer.

According to the report of the C&AG for the FY 2011-12,

Rs 1,06,705 crore were collected by way of TDS, most of

which came from salaried employees. For this period,

total collection from non-corporate assessees was Rs

91,974 crore only. Salaried assessees are the most

disciplined taxpayers discharging their tax obligations

regularly and faithfully.

Yet, they became easy target for garnering more taxes by the Ex-Finance

Minister, paying scant attention to those who evade taxes on large scale and

generate enormous black money in the country, which does not add to the

GDP.

The one big blow to the salary-earners given by the Finance Act, 2005,

presented to Parliament by Shri Chidambaram was abolition of Standard

Deduction (SD). The position in regard to this is discussed in later

paragraphs.

2. Abolition of SD

The reasons given by the Ex-FM for removing SD, it needs to be said with

utmost respect, are misleading and wrong. Shri Chidambaram in the budget

speech 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.‖

These grounds are superficial and do not justify withdrawal of SD, as SD is

not for personal expenditure and is being given in lieu of employment-

Volume VII Part 6 June 25, 2014 4 Business Advisor

related expenses. Further, the exemption limit has been raised not only for

salaried employees but also for all individual taxpayers.

SD is in lieu of expenditure [allowed u/s 16 of the I.T. Act, 1961 (Act

hereinafter)] incurred for earning salary income and hence, deductible for

working out taxable salary income. Section 16 of the Act, dealing with

deductions from salaries, underwent a vital change from 1.4.1975 by the

Finance Act, 1974, when clause (i) was substituted by a new clause and

clauses (iii), (iv) and (v) were omitted. These later clauses (iii) to (v) dealt with

deduction from salary income of (i) professional or other taxes; (ii) expenses

for conveyance used for the purpose of employment; and (iii) expenses

incurred wholly, necessarily and exclusively in the performance of duties,

excluding expenses on purchase of books or publications or on

entertainment or conveyance, which were covered by clauses (i) to (iv) of

section 16.

Thus, in cases of salaried employees, expenses for earning salary were

allowed in the same way as expenses for earning business income on the

philosophy that expenses incurred wholly and exclusively for the purpose of

earning income are allowable deductions and this is fully engrained in the

concept of SD, which term was used to represent such expenses limited to

the extent provided in the relevant provision.

Notes on clauses of Finance Bill, 1974, show that change in section 16

providing for SD from salaries was made to replace the existing provision in

section 16 relating to separate deductions in respect of expenditure on

travelling, books, performance of duty, etc., for rationalisation and to

introduce simplification by a consolidated deduction termed as SD. The

amount of deduction has been changing from time-to-time to counteract

impact of inflation but the nature remains the same, namely, that it is to

compensate for expenses required to be incurred, which are incidental to

employment in the computation of salary income. It is not in the nature of

personal allowance as wrongfully stated by the Hon‘ble Ex-FM.

The scheme of the Act is clearly indicative of the position that the income,

liable to tax, is not the gross income but the income remaining after

deducting the expenses incurred in earning the same as permitted under

the Act. Where there is no specific statutory provision for a deduction in the

computation of taxable income, it does not mean that there would be no

deduction. The question in such a situation is to be resolved on the basis of

commercial accounting principles and practices provided they do not go

against the grain of the Income-tax statute. This principle has been

accepted for all sources of income, whether these relate to salaries, income

Volume VII Part 6 June 25, 2014 5 Business Advisor

from house properties, business or profession, capital gains or income from

other sources in various sections of the Act. If expenditure relating to

earning of income is deductible in cases of other sources of incomes, there

is no rationale for not allowing deduction for expenses incurred for earning

salary income, which were allowed item-wise till 31.03.1975.

For simplicity, the concept of giving lump sum deduction as SD was

introduced. Obviously, this deduction was not conceived as donation,

charity or personal allowance for salaried persons but in lieu of expenses

that are required to be spent for earning salary income.

The ground given that SD is a personal expenditure is, obviously,

ridiculous. It is in lieu of employment-related expenses on books,

computers, websites, e-mails, employment-related journals and on various

other such expenses.

If such expenditure in full can be claimed by businessmen and

professionals in computation of their total incomes for tax purposes, there is

absolutely no ground to deny even token deduction for expenses in the form

of SD for salaried employees.

The last ground that removal of SD is in conformity with growing

international practice is also wrong. The Shome Panel‘s report shows that in

many countries like Malaysia, Indonesia, Germany, the UK, Japan, France,

and Thailand, SD in some form or the other is being allowed to salary

earners for employment related expenses.

From the above, it is clear that there is no justification for withdrawing SD.

In doing so, the FM has been extremely harsh on the salaried employees.

The foregoing discussion clearly brings out the injustice done by Shri

Chidambaram on salaried taxpayers and perpetuated throughout his tenure

as FM. In present times, when there is so much competition for

employment, such assessees have to keep themselves updated by incurring

expenses on books, journals, computer software, maintenance of

computers, travelling, undergoing training and on many other such

employment related activities. Such decision is sheer arbitrary use of power

in the case of salaried taxpayers and keep on persisting with the same is

worst.

It is hoped that the new FM of NDA Government will realise the injustice

meted out to such fixed income group assessees and restore the SD lawfully

permissible to them in tune with the present cost of living.

(T. N. Pandey is Former Chairman, Central Board of Direct Taxes)