The Finance Bill seeks to modify the law relating to taxability of certain specified savings completely, by proposing to delete the existing section 88, and replacing it with S.80C. Changes at the point of accrual of income are also proposed by deleting S.80L. Consequential amendments are also proposed in Ss.10, 54EC, 54ED, 80CCC, 80CCD, 295, and a new section 80CCE is proposed to be inserted.

This article attempts to make a detailed study of the proposed scheme.

"Taxable banking transaction" has been defined to mean:

The proposed S.80C:

The new Section provides a deduction not exceeding Rs One lakh to an individual and an HUF, in respect of the following payments:

1. Payment of life insurance premium (including payment made in respect of spouse and children of the assessee and in respect of HUF, any member of the family);
   

2. Payment made for a contract of deferred annuity (including payment made in respect of spouse and children of the assessee);
   

3. Payment by way of deduction from salary by the Govt of an amount not exceeding 1/5th of the salary for the purpose of securing a deferred annuity to the employee;
   

4. Contribution to provident fund to which the Provident Funds Act, 1925 applies;
   

5. Contribution to any provident fund set up by the Central Govt and notified in the Official Gazette (including payment made in respect of spouse and children of the assessee and in respect of HUF, any member of the family);
   

6. Employee's contribution to a recognised provident fund;
   

7. Employee's contribution to an approved superannuation fund;
   

8. Subscription to specified securities;
   

9. Subscription to savings certificates under Govt Savings Certificates Act, 1959;
   

10. Contribution to ULIP (including payment made in respect of spouse and children of the assessee and in respect of HUF, any member of the family);
    

11. Contribution to unit-linked insurance plan of the LIC Mutual Funds (including payment made in respect of spouse and children of the assessee and in respect of HUF, any member of the family);
    

12. Annuity plans of LIC or other insurers;
    

13. Subscription to units of mutual funds notified u/s 10(23D);
    

14. Contribution to pension funds notified u/s 10(23D);
    

15. Subscription to deposit schemes and contribution to mutual funds set up by National Housing Bank;
    

16. Subscription to the deposit schemes of notified public sector housing finance companies, or authorities dealing with housing accommodation;
    

17. Tuition fees paid to any university, college or other educational institution situated within India (in respect of any two children of the assessee);
    

18. Any payment by way of the following payments in respect of house property:
    

    1. Loan repayment of a housing development board or similar a housing authorities;
       

    2. Repayment of loan to any company or a co-operative society of which the assessee is a member;
       

    3. Repayment of loan borrowed from Central Govt, any State Govt, banks, LIC, or National Housing Banks, housing finance companies, housing finance societies, assessee's employer in case of employees of the Govt, public companies, public sector companies, universities, colleges or local authorities;
       

    4. Stamp duties, registration fee and other expenses incurred for transfer of the house property to the assessee.

    
    

    However such eligible amount shall not include the following payments, namely,
    

    1. Membership fee of a co-operative society or a company;
       

    2. The cost of repairs and renovation incurred after the completion of the house property, or its occupation;
       

    3. Any expenditure in respect of which a deduction is allowed under the provisions of taxability of income from house property;

    
    

19. Subscription to eligible issues of capital by public companies;

Where an assessee terminates his life insurance policy within 2 years (clause (i)), or terminates his participation to unit-linked insurance plan within 5 years (clause (x)), or transfers his house within 5 years of obtaining possession (clause (xviii)), then no deduction shall be allowed under the relevant clauses, and the deduction so allowed in the preceding years shall be deemed to be the income of the previous year. Similarly when the equity shares or debentures on which the deduction has been allowed under this section are sold within a period of three years from the date of acquisition, the amount of deduction allowed earlier shall be deemed to be the income of the year of sale.

Ss.(7) clarifies that for the purpose of this section, investments referred to in S.88(2) shall be eligible for deduction in the manner specified in this section.

A Section 80CCE is proposed to be inserted to clarify that the aggregate amount of deduction under sections 80C, 80CCC, and 80CCD shall not exceed Rs One lakh.

Clause 28 of the Finance Bill seeks to omit S. 80L.

Higher deduction:

Section 88 provides for rebate from tax liability as under:

1. Where gross total income is Rs 1,50,000 or less, 20% of such investments;
   

2. Where the income under the head "salaries" does not exceed Rs. 100,000 and the "salaries" income is not less than 90% of the gross total income, deduction eligible is 30% of such investments;
   

3. Where the gross total income is between Rs 1,50,000 and Rs 5,00,000, 15% of such investments;
   

4. Where the gross total income is more than Rs 5,00,000, no deduction shall be available.

The proposed scheme provides for a deduction from income rather than from tax, and provides for a deduction of an investment of Rs 1,00,000 irrespective of the income slab of the assessee. The effect of this is that while the earlier scheme provided for a deduction, which was lower as the gross total income of the assessee increased, the proposed scheme, in fact, proposes a higher deduction for assessee having higher income. An assessee, who falls under lower tax slab would get less effective benefit than an assessee in higher tax slab.

Sectoral caps removed:

The present law provides for maximum qualifying amount in respect of many of the investments. Thus, it provides for a limit of Rs 70,000 in respect of specified savings, which also includes repayment of housing loans (with a limit of Rs 20,000) and tuition fees (with a limit of Rs 12,000 per child, with a maximum of 2 children), and an additional limit of Rs 30,000 in respect of infrastructure shares, debentures and bonds. The proposed amendment seeks to do away with all internal limits, and provides that all specified investment shall be covered irrespective of the amount of each investment. For example, the assessee shall now have an option of utilising the full limit by making a payment of Rs 1,00,000 towards PPF. This means a considerable flexibility for the taxpayers, and a great deal of simplicity in assimilating the provision. The only sectoral limit that now remains is in respect of the education expenditure being restricted to any of the two children.

Can we implement the EET system? :

The Memorandum to the Bill clarifies that 'the existing provisions of Income Tax Act do not accord a homogeneous to the taxation of financial savings'. 'There is a considerable variation in the taxation of the contributions made to savings schemes, the tax levied on the accumulation, and the tax treatment at the final stage of withdrawal.' The Memorandum further explains that the desire of the Govt is to remove this distortion and tax the income on EET basis. Under this scheme, the contribution to the specified savings is exempt from tax (E), the accumulation is also exempt from tax (E), but the withdrawals from the savings are taxed (T).

The Memorandum confesses that 'shift from the existing EEE method to EET method is likely to impose transitional administrative problems'. 'It is therefore proposed to set up a committee of experts to work out the roadmap of moving towards the EET'. The proposed amendments to the law seem to be the first step in moving towards the EET. The deletion of S.80L, which had partially exempted the accrual, is another step in this direction. But whether an absolute shift to EET could be possible especially in respect of investments committed in the past is a difficult question to answer.

Some of the savings are made with a longer time horizon, and under the existing laws, they enjoy exemption from taxes on withdrawal. For example, S.10(10D) exempts from tax all sums received from LIC. If an attempt is made to put this sum to taxable, it would amount to taxing the amount which, was spent by the assessee when the law provided for exemption on withdrawals. It is not possible to apportion the amount between the amount, which was paid when the EEE scheme was prevalent, and the amount paid during the existence of EET regime. Any attempt to put the old investment to tax would mean a breach of promise on the part of the Govt.

If a scheme like EET is to be implemented within the framework of the existing laws, the law would be required to be amended to provide that the specified savings made after the specified dates, would fall under the tax net. Payments made in respect of policies contracted earlier would continue to be under the EEE scheme. Even when implemented on this pattern, it would entail a detailed record keeping by the assessees, lest it results in a mix-up causing confusion. This is not easy to implement. Until then the taxpayer can have his cake and eat it too.

Old wine in old bottle:

This method of taxation of specified savings is not new. The savings were taxed till 1990, under the same S.80C, which was omitted by the Finance Act, 1990. The apparent reason which seems to have prompted the shift to this method is, ' a large number of countries have adopted this method and many countries are moving towards it'. However, it seems the implementation issues may make the shift to EET difficult, which may mean a bonanza for the taxpayer: he would continue to get higher deduction, with no tax being put on withdrawal.