Letter to Finance Minister - Recommendations for the Union Budget 2018-19

December 28, 2017

The Hon. Finance Minister,

Government of India,

New Delhi,

Respected Sir,

Sub: Recommendations for the Union Budget 2018-19

The Union Budget is one of the most eagerly awaited event by the people of the country at the beginning of every year.

Will the Budget bring down taxes?  This will be probably the most-asked question in the coming month, before the Finance Bill is tabled in Parliament.

But though we are a nation obsessed with tax, the startling fact is that only 3% (4.1 crore Indians) of the total population filed income tax returns in 2014-15.  Only 1.6% actually paid income tax. One out of two Indians who filed a return declared zero taxable income. 

Even so, the budget proposals relating to tax slabs, deductions and exemptions are very closely watched by Indians, almost as if the Budget is only about personal taxation.

In the previous Budget, nearly everybody had expected that the finance minister will offer significant tax relief to the middle class to act as a balm after the searing pain of demonetization.

However, though the Budget did reduce the average taxpayer's tax burden, it also took away some benefits. The cap on the deduction of home loan interest was a major shock for those with houses put out on rent. 
This year, the expectations of a taxpayer friendly budget are even higher, given that five states have assembly elections in 2018 and the General election in 2019.

Based on our inter-action with the common man, ALERT CITIZENS FORUM OF INDIA is proposing the following 8 recommendations which we request that the Finance Minister give a serious thought of addressing so as to provide relief to the common working class people – bulk of whom are the supporters and voters of this Government.

1) Increase duration for education loan deduction 

Under Section 80E, the interest paid on an education loan from a qualified lender can be claimed as a tax deduction. But this benefit is available only for a maximum of eight financial years. When this deduction was introduced in 2006, a four-year engineering course cost around Rs 3-4 lakh and a medical degree cost around Rs 5-6 lakh. Since then, the cost of higher education has risen quite sharply.

Today, an engineering course costs Rs 8-9 lakh and a medical degree roughly Rs 12-14 lakh. The prevailing interest rates for education loans range from 10.5% to 13.5%. Assuming a rate of 11.5%, the EMI for a loan of Rs 25 lakh for eight years will come to around Rs 40,000. The average borrower may have to extend the loan well beyond eight years. So the window for tax deduction should also be widened. Just like a home loan, it should be available for the full tenure of the loan. This would encourage young Indians to seek top-grade education and build a strong foundation of human capital. 

2) Raise limit for tax deduction for NPS contribution by self-employed.

Under Section 80CCD (1), there is a cap on the tax deduction that self-employed taxpayers can claim on contributions to the NPS. The 2017 Budget had increased this cap from 10% to 20% of gross income, to bring in parity between salaried and self-employed taxpayers. However, for self-employed taxpayers this comes under the overall deduction limit of Rs 1.5 lakh under Section 80CCE. On the other hand, an employee can claim deduction for up to 10% of his income under Section 80CCD (1) within the overall limit, and a further deduction of employer's contribution of up to 10% of salary under 80CCD(2), without any overall limit. To bridge this gap, the overall limit for self-employed taxpayers should be raised to match the benefits available to salaried employees. 
The government should consider raising the limit under Section 80CCE to say Rs 5 lakh or 20% of the gross income. This will encourage self-employed taxpayers to invest more in NPS. 

3) Abolish dividend distribution tax.

The dividend distribution tax (DDT) discourages companies from paying dividends, which dampens investor confidence. The DDT should be removed to improve investor sentiment. There is also a need to amend Section 14A, Rule 8(d), which seeks dis-allowance of expenses. Inclusion of divided in 'exempted' income is misleading and untrue because dividends are already taxed under DDT.

4) Bring back standard deduction for salaried class.

The Finance Minister indicated that there are plans to reduce corporate tax rates this year, as in previous budgets. He should also consider reducing the individual tax rates or increasing slab limits. While others are paying tax after the deduction of expenses, the salaried class is obligated to pay tax at the gross level. This is an unfair arrangement. The best way to resolve this is to bring back 'standard deduction’. A flat standard deduction percentage can be fixed for the salaried class, thereby restoring equity between them and other taxpayers. 

5) Facilitate donation and gifting of investments.

The tax laws need to be changed to allow donation and gifting of securities, such as listed stocks and mutual funds, without tax implications. The value of the gift or donation could be calculated as the fair market value of the securities on the date of actual transfer. This would give the donor or gift giver two benefits: exemption from capital gains tax on the securities; and tax-deduction on the amount from their income.

6) Reduce GST on insurance products from 18% to 5%.

The goods and services tax (GST) has simplified the cascading tax structure and reduced tax rates for a host of products and services, thereby reducing the burden on end consumers. However, the tax bracket on financial services has been hiked from the initial 15% to 18%. This has made life insurance products costlier, especially pure protection and endowment plans. In the absence of a comprehensive social security mechanism, insurance provides the first layer of financial security to an individual or family. It is, therefore, imperative to exempt insurance products or subject them to 5% GST. 

7) Hike tax-free limit for medical allowance.

There has been a marked increase in the incidence of communicable and lifestyle diseases in India, driven by unhealthy eating habits and lifestyles. To make matters worse, there has been a steady rise in medical inflation, which is currently growing at 18-20% per annum. So, the medical expenses of the average household can easily exceed the medical allowance limit of `15,000 per year. Health insurance policies normally don't cover expenses like consultation fees, medicines and diagnostics, and individuals have to shell the extra amount out of their own pocket. Companies usually cap the medical allowance at the tax free limit of Rs 15,000. If this limit is revised upwards, companies will also be encouraged to hike the allowance.

8) Make home insurance mandatory and offer tax deduction on premium.

The government should make home insurance compulsory and incentivize home buyers by providing income tax benefit for the premium paid towards a policy. This will not only ensure protection against financial loss for customers, but will also aid in deepening insurance penetration in the country. 

We hope that the Hon. Finance Minister shall accept our recommendations and provide succor to the common, working (salaried) class people of the country.

Regards,

For ALERT CITIZENS FORUM OF INDIA,

Dayanand Nene                                       Prasad Bedekar

President                                                    Secretary

Alert Team: Anirudha Godse, Rajan Chandok, Jitendra Satpute, Ms. Sandhya Malhotra, Pramod Date, Kiran Joshi, Ganesh Iyer.

Shri Arun Jaitley ji,

Hon. Finance Minister of India,

North Block,

New Delhi.