Nearly a decade after it was abolished in Budget 2007, there is a clamour to re-introduce 'Standard Deduction' to incentivise the salaried class by leaving a significant annual disposal income in their hands so that they can kick-start domestic consumption.
For the salaried, Standard deduction (SD) is equivalent of business-related expenses that businessmen deduct before arriving at their taxable income.
In its previous avatar, SD was capped at Rs 20,000 for salaried employees earning above Rs 5 lakh a year. For employees with annual income of between Rs 75,000 and Rs 5 lakh, SD of Rs 30,000 or 40 per cent of income--whichever was lower--was allowed.
If the FM is inclined to re-introduce SD, he should tie it to the extent of digital transactions the assessee makes during the year. Up to a cap of, say, Rs 30,000 or even Rs 50,000 (in case the FM doesn't intend to raise the minimum taxable income from Rs 2.50 lakh to Rs 3 lakh), SD should be claimed proportionate to the digital transactions conducted by the assessee during the financial year.
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The government needs to keep the definition of digital transactions as wide as possible. For instance, it must include all utility bill payments done digitally, all online bank transactions, including transfers via NEFT, IMPS, all credit and debit card transactions (excluding cash withdrawals/deposits); all wallet payments, etc.
Ideally, every Rs 2 transacted digitally should earn Rs 1 worth of standard deduction. This ensures that the higher income group conducts at least Rs 1 lakh worth of transactions digitally every year to claim Rs 50,000 worth of SD. Nothing stops the government from raising the SD cap from year to year.
Just like housing loan interest certificates, banks/payment banks, credit card companies, wallet should auto-generate Digital Transactions certificates and mail them to their customers. The IT tax assessee can collect all its digital transactions certificates and submit them to the I-T authorities along with annual IT returns to claim SD.
But none of this is going to be feasible if transactions charges remain as high as they are today. Credit cards have no cap on transaction charges; debit card charges were capped at 0.75 pc in 2012. Even these are capricious.
Most payments banks and wallet companies have suspended transaction charges for the moment in their race to beat each other at acquiring customers. However, they will begin charging when they are in a position to arm-twist the customer.
Andhra chief minister Chandrababu Naidu, who heads the state Chief Ministers' Committee on Digital Payments, has recommended abolishing all transaction charges in its report to the government.
Instead, Naidu recommends that digital infrastructure companies such as credit cards firms and banks be given minimal compensation by the government for aiding digital transactions. Clearly, the tyranny of digital transactions needs to be abolished if the government expects the SD-digital money objective to deliver the desired result.