WAY back in 1989, Madhu Akotkar, a journalist and a co-operative bank employee by profession, filed a public interest litigation (PIL) in the Bombay High Court to protest against the taxation of allowances of salaried employees. An example that the Maharashtra Judges Association and other individuals followed, filing writ petitions on the same lines. It's an issue that impacts over five crore people—the entire salaried class, governmental and non-governmental. But so far, the case hasn't had a single hearing.
The case was saved from an unsung death when the petitioners prayed to the Court in 1996 that as the issue was in the interest of the general masses, they should be allowed to make it public. The court permitted an announcement in the press. Since then the case has been resuscitated by an overwhelming response—14,000 individuals have pledged support. The All-India Judges Association, backed by 10,000 members, has also filed a similar writ, which awaits admission.
Challenging the Union Government of India and others, the PIL states that it is unconstitutional and illegal to tax compensatory allowances like the City Compensatory Allowance (CCA), the House Rent Allowance (HRA) and the Dearness Allowance (DA) of salaried employees. Such allowances, asserts the petition, are not by definition in the Income Tax Act of 1961, classified under income, salary, emoluments or perquisites and so can't be taxed. The PIL, therefore, demands re-imbursement of the monies collected so far as taxes on these allowances.
Says Akotkar: "There is no personal benefit to the employees through these allowances." Allowances like CCA and HRA are granted to compensate the extra expenses incurred by employees by reason of an employee's posting or working in a city. The DA is granted in an effort to neutralise the rising cost of living to some extent. In reality, the allowances barely cover half the expense.
The petitioners back their argument with an earlier judgement by the MP High Court. In October 1975, (Bishamber Dayal, ex-chief justice MP High Court vs the Commissioner of Income Tax, MP) chief justice P.K. Tare and judge S.S. Sharma passed a judgement which stated: "Compensatory allowance cannot be included in total income under the head 'salaries' or 'perquisites' for the purpose of income tax assessment. There is no question of any additional benefit out of it but merely to counter-balance the loss or inconvenience sustained.... Compensatory allowance means an allowance granted to meet personal expenditure necessitated by the special circumstances in which duty is performed." The concept was reiterated in another case in the Bombay High Court.
The Fifth Pay Commission report also supports the petition. The chapter on Income Tax on Salaries and Pensions recommends that "all allowances may henceforth be paid net of taxes". The recommendation is based on the findings of the government-supported Fiscal Research Foundation (FRF).
THE proverbial hornet's nest has been stirred up. It emerges that the taxation procedure is discriminatory. Says Akotkar: "The law-making and enforcing machinery seem a privileged lot." MPs and MLAs get salaries, allowances and pensions from state and Central governments. But their pay packets are structured differently. For instance, an emolument of up to Rs 1.5 lakh is completely untaxed. A similar income of any regular salaried employee attracts income tax of Rs 15,000 to 20,000. The Fifth Pay Commission points out that the ministry of external affairs pays net of tax salaries to its employees on foreign postings.
The Tare and Sharma judgement of 1975 had stated that "compensatory allowance does not include sumptuary allowance (SA)". However, the Chief Justice of India gets up to Rs 4,000 per month and the chief justices of the high courts and other judges of the Supreme Court receive Rs 3,000 per month as tax-free sumptuary allowance. This is due to a special amendment in the High Court Judges (Conditions of Service) Act 1954 declaring the sumptuary allowance tax-free "notwithstanding anything contained in the Income Tax Act 1961". The amendment was made in 1980 with effect from 1975. In 1996 the Lok Sabha unanimously passed a Bill seeking to increase sumptuary allowances and conveyance facilities of the high court and Supreme Court judges. That's when the SA was increased three to six times while petrol allowance was hiked from 150 to 200 litres per month.
Says a supporter: "The law makers pass any amendment that suits their needs." The 1996 Bill to raise sumptuary and petrol allowances of judges, for instance, was passed keeping in view the journeys the judges had to undertake for attending seminars, conferences and meetings, the increase in the price of petrol and the increase in the cost of eatables served at such meetings. Take, on the other hand, a middle-level deputy manager in a co-operative bank in Bombay. He receives Rs 470 as HRA and Rs 125 as CCA included in a gross, taxable income of about Rs 10,000. Nowhere, even up to over two hours of travelling from South Bombay, can a house be acquired for this HRA. Even the cheapest mode of travel costs over Rs 125, leave alone the cost of eating and other incidentals during a work day. But even this CA, which barely meets the need, is taxed. Akotkar points out that the entire income of even the most lowly-paid employee, like a mathadi worker and the entire lower judiciary are taxed according to prevailing rules.
Benefits too are discriminatory. While senior members of the judiciary get rent-free accommodation, subordinate members don't get privileges. If junior members don't occupy government accommodation, they get an HRA which is taxed. If they do, a fixed amount is cut towards house rent from their salary while they receive no HRA.
The December 1991 interim report of the Dr Raja J. Chelliah Committee on tax reforms states that "there does not seem to be any justification for exempting the allowances received by legislators, i.e. MPs and MLAs, by virtue of their membership of Parliament and state legislatures. There is not enough justification for exempting the daily allowance which is given to legislators when they attend the sessions of the legislatures in the headquarters." The report emphasises that "widening of the tax base cannot carry conviction till legislators agree to the inclusion of such allowances in their tax base." It therefore, recommends that the allowances paid to legislators be fully subjected to tax.
The hearing, long overdue, promises to throw open the larger debate of taxing individual income—salaries, interest on securities, house property, business and profession, dividends, capital gains. Over the past years, evidence against it has been gathering. The FRF favoured complete exemption of salary from income tax. The eminent economist, D.R. Pendse, points out that individual income tax accounts for less than three percent of the total government revenue but the cost of collection of individual income tax is several times higher than the cost of collecting indirect taxes. Pendse infers that "individual income tax has been a minor, inefficient and generally a woeful instrument of tax-gathering for the government." In Black Money and Budgets, he affirms that abolishing this will yield significant savings in government expenditure. Besides, with extra income individuals will spend on goods and services where the government will earn indirectly. People will also save in financial instruments which will boost government receipts. Therefore, believes Pendse, "the government will be a prime beneficiary of the abolition."
The matter has been discussed in Parliament in mid-June. Most MPs, reportedly, supported that allowances should not be taxed. The issue now awaits a hearing and resolution on which the fate of over five crore Indian families rests.
