IAS Gyan

Daily News Analysis


21st August, 2023 Economy

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Picture Courtesy: Taxscan

Context: Notification from the Central Board of Direct Taxes (CBDT) regarding changes in the valuation of rent-free accommodation provided to employees by their employers. This change aims to impact the take-home salaries of employees who receive such benefits.

Highlights of the Notification

  • Reduction in Valuation: The CBDT has announced a reduction in the valuation of rent-free accommodation provided to staff by employers. This reduction is expected to increase the take-home salaries of employees who enjoy such perks.
  • Impact on Different Employee Levels: The benefits of this change will be more pronounced for top management professionals and other high-salaried employees. These individuals typically receive higher-value perquisites as a share of their overall remuneration package.
  • Effective Date: The changes in the valuation of rent-free accommodation will come into effect from September 1. This means that the new rules and calculations will be applied starting from this date.
  • Valuation for Unfurnished Accommodation Owned by Employer: If an employer provides unfurnished accommodation to employees, and this accommodation is owned by the employer, the valuation for the benefit will be as follows:
    • In cities with a population exceeding 4 million as per the 2011 Census, the valuation will be 10% of the employee's salary.
    • This marks a reduction from the previous valuation rate of 15% that was in place. The change in the population threshold from the 2001 Census to the 2011 Census has also been noted.

Overall, these changes are expected to have an impact on how rent-free accommodation benefits are calculated for tax purposes. Employees who receive such benefits, especially those in higher income brackets, will likely experience an increase in their take-home salaries due to the revised valuation rates. Both employers and employees need to be aware of these changes and ensure proper compliance with the new rules.

Central Board of Direct Taxes (CBDT)

  • It is a statutory authority functioning under the Central Board of Revenue Act 1963.
  • It is part of the Department of Revenue within the Ministry of Finance.
  • Functions
    1. Formulates policies related to direct taxes.
    2. Deals with matters concerning the levy and collection of direct taxes.
    3. Supervises the functioning of the entire Income Tax Department.
    4. Proposes legislative changes in direct tax laws.
    5. Suggests changes in tax rates and structures in alignment with government policies.
  • The Chairman and Members of CBDT are selected from the Indian Revenue Service (IRS).

Must-Read Articles:

DIRECT TAXES: https://www.iasgyan.in/daily-current-affairs/direct-taxes-36

DIRECT TAX COLLECTIONS: https://www.iasgyan.in/daily-current-affairs/direct-tax-collections#:~:text=Direct%20taxes%2C%20usually%20levied%20on,income%20tax%20and%20wealth%20tax.


Q. Consider the following statements in the context of “Direct taxes”.

1. Direct taxes are often designed to be regressive.

2. Tax liability is specific to each individual or entity and is calculated separately.

3. Direct taxes directly affect the disposable income and financial well-being of individuals or entities.

4. Direct taxes contribute to a fair distribution of the tax burden.

How many of the above statements is/are correct?

A. Only one

B. Only two

C. All three

D. None

Answer: C


Statement 1 is incorrect: Direct taxes are often designed to be Progressive taxation, it refers to a tax system where the tax rate increases as a person's income or wealth increases. This is typically done to achieve income redistribution and reduce economic inequality. The underlying idea is that individuals with higher incomes can afford to contribute a larger portion of their earnings to taxes without significantly affecting their quality of life.

Statement 2 is correct: Individual liability in taxation means that each person's or entity's tax obligation is calculated separately based on their specific financial circumstances. This personalized approach ensures that taxes are assessed fairly, taking into account differences in income, deductions, exemptions, and other financial factors.

Statement 3 is correct:  Direct taxes, such as income taxes and wealth taxes, have a direct impact on an individual's disposable income and overall financial well-being. These taxes are deducted directly from a person's income or wealth before they have a chance to utilize the funds. As a result, direct taxes can significantly influence an individual's ability to save money, invest, or make discretionary expenditures.

Statement 4 is correct: Direct taxes are often considered more equitable and fair because they take into account an individual's ability to pay. By assessing taxes based on income or wealth, those who earn or possess more contribute a higher proportion of their resources to the government. This approach aligns with the principle of "ability to pay," where those who have greater financial means contribute more to public services and social programs.