Shri Jaitley needs to be fair to the salaried taxpayers and remove injustice of withdrawing standard deduction by Shri Chidambaram - Article by T. N. Pandey (Published in Business Advisor dated June 25, 2014)

1. 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-

2. 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

3. 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)