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How the quake tax will affect you

Ganesh Jagadeesh & Co.

The quake that shook the earth in Gujarat also shook the hearts of all Indians. Until last week, all those shedding tears at the thought of the calamity were genuine sympathisers. However, following the announcement of the Prime Minister's tax-oriented relief measures, not all of those who are shedding tears may be grieving solely over the tragedy; they may well be lamenting the first of the aftershocks of the additional 2 per cent surcharge on tax levied on incomes of individuals and companies for the current financial year 2000-01.

With the government hinting at the possibility of some more stringent direct and indirect tax measures, we may be well on our way for a very bad tax season. Read further for an assessment of the fallout on individual taxation of the increase in tax surcharge.

Impact on the effective tax rates for Financial Year 2000-01

Slab	Income (Rs)	Tax rate (%)	Sur- charge (%)	Effective tax rate (%)	Addl. surcharge (%)	Total surcharge (%)	New tax rate (%)	Rise in tax rate (%)
A	0-50,000	0	0	0	0	0	0	Nil
B	50,001- 60,000	10	0	10	0	0	10	Nil
C	60,001- 150,000	20	10	22	2	12	22.4	0.4
D	150,001 and above	30	15	34.5	2	17	35.1	0.6

Tax Deduction at Source

a. Impact on salaried employees

In the case of a salaried employee, the amount of TDS is based on his/her estimated annual tax liability. The employer can adjust the TDS amount in order to account for enhancement or reduction in an employee's tax liability during the course of a year. In the current year, the additional surcharge will require employers to revise the TDS upwards. The result: the entire burden of the additional tax would have to be borne by the employee in the last two months of this financial year.

A sample of the impact of the additional levy has been depicted in the table below; the results may be extrapolated for relevant income figures.

Head	Slab A	Slab B	Slab B	Slab C	Slab C	Slab D
	Rs	Rs	Rs	Rs	Rs	Rs
Net taxable income	50,000	50,001	60,000	60,001	150,000	150,001
Tax	-	0.10	1000	1000.20	19,000	19,000.30
Old surcharge	-	-	-	100.02	1900	2850.045
Total tax-old	-	0.10	1000	1100.22	20,900	21,850.345
New surcharge	-	-	-	120.02	2280	3230.051
Total tax (new)	-	0.10	1000.00	1120.22	21,280	22,230.351
Increase in total tax to be paid by March 2001	-	-	-	20.00	380.00	380.01

It would not be wrong to state that higher the salary income, wider will be the gap between the total tax at old rates and new rates and higher the TDS that would need to be recovered from the salary amounts for the last two months in fiscal year 2000-01.

b. Impact on Others (earning income other than from salaries)

As the change would be prospective and for the current financial year, TDS with additional surcharge would be liable on credits/payments with effect from the date of notification of such revision. Hence distinct from the TDS on salary payments, other credits/payments would not require adjustment of TDS for past payments made during 2000-01.

Advance Tax

A person liable to pay advance tax is required to estimate his/her income for that financial year and pay advance tax on the specified due dates. The income tax rates to be considered in the calculation of the estimated tax are the rates in force during the financial year. Based on these stipulations, most of the tax paying assessees would have already planned and/or paid their advance taxes for 2000-01. With just one installment to go (March 15, 2001) for the current financial year, owing to the additional surcharge, assessees can be pictured re-computing their entire tax liability to plan and meet the last installment deadline.

Tax Planning

The annual budget is presented before the beginning of a new financial year, in part, to inform people as to what they could expect on the tax front for that year and plan accordingly. Any midway upward revisions, however small they may be, are always difficult to cope with as they disturb the tax planning and put pressure on individual assessees. As the present revision has come at the fag end of the financial year, assessees will quickly need to modify their well-planned tax structures.

Relief from relief measures - Persons making contributions to the relief and rehabilitation efforts can avail of a 100 per cent deduction on such amounts; however, it must be noted that this deduction is available only for contributions made (upto September 2001) to charitable institutions registered under section 80G who shall use such monies for providing relief to earthquake victims. This noble act though done without any intention of deriving reciprocal benefit may in a practical sense serve as a tax planning method for donors.

Tax shocks - with a twist

• Individuals will be required to fork out more for white goods, if as reported, these products get burdened with increased levies in respect of excise duty.
• With corporates having to shoulder an additional 2 per cent tax surcharge, individuals may find their prospective earnings from dividend income taking a knock.

Summary

Though this revision in the rate of surcharge has come in the wake of a national calamity, the government should ensure that by introducing the additional levy middle class people are not adversely effected. The cost of this revision impacting the common man should be compared with the benefit arising out of such revisions, ie additional tax collected from the common man may be small collectively but may be a big financial constraint for that person considered individually.

Moreover, with amendments introduced in the last year's Budget, phasing out sops such as deductions eligible to exporters, this possibility of increased tax structure would be very disturbing. The early nineties saw a regime where tax was imposed and was not readily embraced by people. Recent amendments rationalising tax rates and structure showed a trend reversal with more and more people readily coming forward offering their income to be taxed. This is also evident by the increased tax collections recorded in recent times. The only cause for concern with these impending revisions in the tax rates would be the about-turn in current trend, going back to the old world of parallel economy.

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