Feb 01, 2006 07:24 PM
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(Updated Feb 01, 2006 07:32 PM)
There is provision of depreciation for all class of revenue generating assets, considering that all these asset have economic life during which cash must be generated and taken out to replace them.
Any income generation out of these assets are taxed after provisioning of this depreciation.
Like wise Financial assets are subjected to diminution in value due to inflation , which in other word is depreciation in value of financial asset ; any Interest earned out of it is economically are said to be inclusive of inflation loss, and hence there is real rate of return concept is prevalent in all Economically literate world.
Whereas tax on interest is payable on full amount of interest received/accrued , and no inflation related depreciation is allowed to be apportioned out of these interest income.
Given the fact that this interest is consisting cost of inflation; is'nt it fair to allow CPI based inflation rate to be deducted out of this interest , or on income derived from financial assets? After all a Rs100.00 will be worth Rs.95.00 only after a year( assuming 5% CPI inflation) and to maintain the purchasing value of Rs.100.00 at Rs.100.00 of previous year you need to have Rs.105.00 and since the interest rate is only say 8% PA , tax rate is 30% , one ends up paying 2.4% as tax and thus having only 8% - 2.4% = 5.6% as net return and given 5% as inflation , the saving population is virtually earing only 0.6% as Real Rate of Return.
How far is this rate of return justified? and even academically viable even if we assume practical or ideological economic theories in mind.
