There is one look I am very familiar with—the “year-end tax planning look”. Which is why my clients are overjoyed over the speculation that a simplified Income Tax Act may be in the offing. Indeed, the finance minister is hopeful of writing a whole new Income Tax Act, expected to be effective from 1 April 2008. The aim of the new Act is to eliminate complicated legalese. It will also combine direct taxes such as income tax, fringe benefit tax and wealth tax into a single Direct Tax Code. Here are some changes I would like to see in the new Act:
Home Loans: The various clauses on this are complicated. Presently, the interest paid on the loan in the year the house is completed is eligible for deduction, as is the principal repaid. The rules are different for a house under construction. Ideally, the Act can exempt say 50% of the EMI.
Capital Gains: Section 54 and Section 54F, which deal with capital gains, need to be aligned. The former offers exemption from the sale of a residential house if the capital gain is invested in a new house. Section 54F offers exemption from sale of any other asset if the gain is invested in a residential house. Can’t they be integrated to exempt the sales proceeds of any asset invested in a residential house?
HRA: The tax exemption for House Rent Allowance is taken as the least amongst the actual HRA received, 50% of salary (in metros) and actual rent paid, less 10% of salary. This calculation is not understood by many. It would be best simplified to state that if you are paying rent it will be allowed as a deduction.
Wealth Tax: This Act needs to be updated or eliminated. Currently, wealth (say land, jewellery, cars) over Rs 15 lakh earns a tax of 1%. How many of us are aware of this tax?
Stability: The annual changes to the Income Tax Act only complicates matters for the common man. If the same laws remain in place for 5-10 years, he will have enough time to understand them. This will enable him to plan his finances and not be taken in by unscrupulous operators under the garb of tax planning. So is there an alternative? According to a school of thought, instead of tracking the income of each person, why not just tax consumption? Whether this approach is viable is open to debate but I believe that we need to try an innovative approach to taxes.