How rebate u/s 87A has diluted the principle of Income Tax?

P.Jagadeeswaran , Last updated: 29 April 2020
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Introduction:

In India all the revenue augmenting acts and rules are based on the preamble principle(s) of Benefit Vs Ability-to-Pay and Canon of (i) Ability, (ii) Certainty, (iii) Convenience, (iv) Economy, (v) Elasticity and (vi) Productivity and its exigency at the time of introduction or at the time of amendments or as it appears to be so.

When it comes to Direct Tax in India, the principle and canon of Ability-to-Pay will prevail over others.

Secondly, the acts and rules enacted in the country should be within the powers granted by the different articles in the constitution, which can be termed as constitutional privileges.

Considering the canon of ability to pay tax, the income tax slabs been introduced and it's been amended from time to time based on the exigency without affecting the canon behind the act.

As such i am not in line with a provision, section 87A of IT act, which gives rebate on Income Tax liability before adding up the cess on IT.

In order to exhibit my views and in support of my argument(s), I just re-produce the tax slab for the FY: 2019-20/ AY: 2020-21

How rebate u/s 87A has diluted the principle of Income Tax

Table:1

Individuals (Other than senior and super senior citizen)
Assessment Year 2020-21
Net Income Range	Rate of Income Tax
Up to Rs. 2,50,000	-
Rs. 2,50,000 to Rs. 5,00,000	5%
Rs. 5,00,000 to Rs. 10,00,000	20%
Above Rs. 10,00,000	30%

Content of Section 87A (applicable for AY 2020-21);

A resident individual having taxable income upto Rs 5,00,000 will get a tax rebate of Rs.12,500/- or equal to the amount of tax payable (whichever is lower), subject to the condition that the assesse should be Resident Individual and his/her total income after reducing the deductions under chapter VI-A (Section 80C, 80D and so on) is not more than Rs 5 lakhs.

Table:2

Showing Assessment of Income Tax liability for the income ranging from Rs.2,49,000/- to Rs.6,25,000/- considering rebate under section 87A and assuming the income is after adjusting deductions under Chapter VI-A, with considerable intervals;

Income level	Income Tax Assessed	Rebate u/s 87A	Tax payable	HE Cess @ 4%	Total of income tax due	Incremental income/ Marginal income	Tax on the incremental income/ Marginal income
Rs.	Rs	Rs	Rs	Rs	Rs	Rs	Rs
249,000	0	0	0	0	0	0	0
250,000	0	0	0	0	0	1,000	0
251,000	50	50	0	0	0	1,000	0
275,000	1,250	1,250	0	0	0	24,000	0
300,000	2,500	2,500	0	0	0	25,000	0
350,000	5,000	5,000	0	0	0	50,000	0
400,000	7,500	7,500	0	0	0	50,000	0
450,000	10,000	10,000	0	0	0	50,000	0
499,980	12,499	12,499	0	0	0	49,980	0
499,990	12,500	12,500	0	0	0	10	0
500,000	12,500	12,500	0	0	0	10	0
500,001	12,500	0	12,500	500	13,000	1	13,000
500,010	12,502	0	12,502	500	13,002	9	2
500,100	12,520	0	12,520	501	13,021	90	19
501,000	12,700	0	12,700	508	13,208	900	187
510,000	14,500	0	14,500	580	15,080	9,000	1,872
512,500	15,000	0	15,000	600	15,600	2,500	520
515,000	15,500	0	15,500	620	16,120	2,500	520
515,500	15,600	0	15,600	624	16,224	500	104
516,000	15,700	0	15,700	628	16,328	500	104
516,500	15,800	0	15,800	632	16,432	500	104
517,500	16,000	0	16,000	640	16,640	1,000	208
518,500	16,200	0	16,200	648	16,848	1,000	208
520,000	16,500	0	16,500	660	17,160	1,500	312
525,000	17,500	0	17,500	700	18,200	5,000	1,040
550,000	22,500	0	22,500	900	23,400	25,000	5,200
575,000	27,500	0	27,500	1,100	28,600	25,000	5,200
600,000	32,500	0	32,500	1,300	33,800	25,000	5,200
625,000	37,500	0	37,500	1,500	39,000	25,000	5,200
650,000	42,500	0	42,500	1,700	44,200	25,000	5,200

Observations;

(a) Income up to Rs.5.00 lakhs the income tax liability is Nil and for the income of Re.1 in excess of Rs.5.00 lakh the tax liability is Rs. 13,000/-. In order to ignore the arguments of rounding off procedurals, I will consider the income of Rs.10 in excess of Rs.5.00 lakhs attracts tax liability of Rs. 13,002/-. Now my question is, is it not a provision which override the canon of the taxation and very preciously how it could be possible for payment of Tax of Rs.13002/- out of the earning of Just Rs.10./-. Further the rate of tax here is more than 100%.

(b) The highest tax rate of 30% is nearing to match at the earning of Rs.6.50 lakhs at the rate of 29.47% as against the 20% rate fixed in the charging section.

(c) Ignoring the facts quoted in Para b above and to remove this anomaly, it is prudential to allow the maximum deduction of Rs. 12,500/- under section 87A for the income up to Rs.5,16,500/-, so that the rate of tax is equal to or less than 100% on the marginal income of Rs.16,500/- in excess of Rs.5.00 lakhs.

(d) Rebate under section 87A is really a wonderful rider for people whose income is within the limit of Rs.5.00 lakhs and it is not a matter of concern for people who earns Rs.6.50 lakhs. It is really a provision which override the canon of ability to pay tax for a person who just crossing Rs.5.00 lakhs and not even crossed Rs.5,00,100/- or Rs.5,16,500/- or so.

(e) This situation is common for people who switch over from third slab to fourth slab where the impact is lesser than what we have discussed above. When we consider the situation of a person who switchover from second slab to third slab the tax liability of Rs.13,000/- is about 31.2% of his monthly earning and the value of the money with him is more powerful as compared to the person who switchover from third slab to fourth slab.

Conclusion;

Considering the different proportions shown in the above two table, I am sure the anomalies are clearly understood and no answers to be posted as it is a clear view of overriding of canon and misleading provisions beyond the constitutional privileges with the legislators and hence it is my humble prayer to consider the issue for suitable remedial measures at the earliest.

Disclaimer: The readers are informed to note that the facts and information's stated in this article is my own interpretations. For any specific requirement of legal opinion on the facts of the case, the reader may reach the author for professional support.

The author is a Practitioner under GST/IT act and under earlier VAT acts of multiple states in the country. He can also be reached at eswaran60@yahoo.com, eswaran1960@gmail.com