Shouldn’t revenue tax be payable solely on revenue?

Income tax is a tax payable on revenue. Unfortunately, at instances, the tax legal guidelines find yourself taxing receipts that aren’t actually incomes, or that are actually capital receipts or return of capital. What are these receipts, and the way are they taxable?

Gifts are a traditional type of capital receipt, which, beneath tax legal guidelines, are handled as an everyday revenue, and are taxed at your slab fee of tax. Exemption for items is proscribed solely to items as much as ₹50,000 per 12 months, or if they’re from outlined shut kin, or obtained on the time of marriage, and so forth. This typically ends in items from shut associates or relations, akin to cousins, being subjected to tax.

The provision, which is supposed to plug loopholes for tax evasion by fictitious items, sadly, additionally impacts real circumstances. While there may be an exemption on quantities obtained or paid by registered charitable trusts, it doesn’t prolong to socially accountable individuals who might increase funds to assist individuals in misery. Though you might use all of the funds you raised for its said objective, maybe even making out-of-pocket contributions to it, tax authorities might search to tax you beneath this provision. Instead of being rewarded for charity, you might find yourself being penalized for it. The revenue tax division can definitely assist alleviate such difficulties by issuing a round which clarifies that quantities raised by particular person benefactors and spent by them on victims of pure calamities or pandemics wouldn’t be taxable.

According to the regulation, even for those who assist a stranger in want by paying him/her greater than ₹50,000, that individual is liable to be taxed on such receipts, though he/she might have used these funds and his/her personal assets to fulfil the necessity. Fortunately, the federal government has realized, although belatedly, the harshness of this provision and introduced on 25 June that quantities obtained by a taxpayer for medical therapy from his/her employer or from any individual for therapy of covid-19 throughout FY20 and subsequent years could be exempt from tax. It additionally stated ex-gratia (with none restrict) an individual receives from his/her employer is tax exempt. Further, quantities as much as ₹10 lakh that the relations of an individual who has succumbed to covid obtain from any individual shall be exempt from tax. This is a welcome leisure, which applies solely to circumstances the place an individual contracts covid-19 or dies from the illness. A query that will come up on this context is whether or not such aid could be out there in case an individual dies inside weeks of restoration from covid, as has occurred in lots of circumstances. One hopes a legislative modification would deal with such circumstances as effectively.

Another sort of capital receipt that’s taxed is beneficial properties on sale of belongings. While indexation of price is permitted for computing capital beneficial properties on sale of property, such indexation neutralizes solely 75% of the influence of inflation. Therefore, although your property might not have appreciated in actual phrases, if the influence of inflation is factored in, you continue to find yourself paying tax on a part of your inflation-adjusted capital price. Besides, on sale of listed shares, such indexation is not out there. Therefore, the longer you maintain shares that rise on the similar tempo as inflation, the better the tax you pay. Assume you got shares in 2018 for ₹100,000, whose worth of ₹125,000 immediately in actual phrases is similar as the worth of ₹100,000 in 2018, you’d nonetheless find yourself paying tax of ₹2,500 on beneficial properties of ₹25,000. But this acquire is admittedly nothing however an phantasm created by inflation.

The third sort of receipt of capital which is taxed is annuity or pension beneath a pension or annuity plan, the place there is no such thing as a return of capital on maturity or demise. The annuity or pension that you simply obtain, subsequently, additionally includes a portion that’s actually return of your capital, however but the whole quantity of annuity is taxed as your common revenue. Fortunately, in case of life insurance coverage insurance policies, as a consequence of latest amendments within the TDS provisions, it’s now clear that solely the surplus quantity obtained by you over and above the premium paid could be taxable as revenue. In case of pension fund insurance policies issued by life insurance coverage firms, there might be conditions the place you’ve been allowed deduction of solely a part of the quantity of premium paid; however tax authorities might search to tax the whole receipt on untimely give up of the coverage. In such conditions, an argument out there is that solely the quantity obtained to the extent of the contribution allowed as deduction, and the appreciation, may be taxed and never the whole receipt.

These are anomalies within the tax legal guidelines that definitely should be remedied. Taxpayers shouldn’t be taxed on quantities that aren’t primarily of an revenue character, or that don’t end in an enhancement of their capital in actual phrases.

Otherwise, taxes are taking away a portion of taxpayers’ capital within the garb of taxing them on their incomes, which isn’t the hallmark of an affordable or honest tax regulation.

Gautam Nayak is accomplice, CNK & Associates LLP.

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