Tax payers find themselves between the devil and the deep sea

Tax rebates now categorsied according to income tax slabs; and surcharge of 5% imposed for taxpayers having total income over Rs 60,000

Highlights

• Personal Income tax rates remain unchanged at 10%, 20% and 30%.

• Administered interest rates to be benchmarked to the average annual yields of government securities of equivalent maturities in the secondary market.
• Reduction of 50 basis points will be made in the interest rate applicable to Government of India Relief Bonds. Further, a ceiling of Rs 2 lakh per year is being put on investment in these bonds.

• Deduction for interest payable on housing loans for self-occupied houses allowed even where such houses are acquired or constructed after 31st March 2003, as long as the acquisition or construction is completed within three years from the end of the financial year in which the loan was taken.
• Extension of the capital gains exemption provided in section 54EC of the Income-tax Act to bonds issued by the National Housing Bank.

• No perquisites will be assessed for the assessment year 2002-2003 in the case of employees whose taxable salary, excluding perquisites, is upto Rs 1,00,000.

• Dividend from mutual funds to be taxed in the hands of the investor.

• Rebate at the existing rate of 20% only to persons having taxable income upto Rs 1,50,000. Persons having taxable income between Rs 1,50,000 and Rs 5 lakhs will get a rebate of only 10% of the amount invested, and no rebate will be allowed where taxable income exceeds Rs 5 lakhs. The special rebate of 30% for persons having taxable salary income upto Rs 1 lakh will, however, continue.

• Imposition of a penalty of Rs 10,000 in all cases where a false PAN is quoted in documents relating to specified transactions.

• Surcharge of 5% across-the-board on all categories of taxpayers, except individuals and Hindu Undivided Families having total income upto Rs 60,000.
• VRS tax exemption extended to certain institutions of national or state- level importance
• Service tax extended to sectors such as life insurance, beauty parlours, dry claening agents, cable operators, health club and fitness centres, rail travel agents, event management
• Bonds issued by SIDBI and National Housing Bank to get capital gains exemption under Section 54 EC

• LPG price hiked by Rs 40 per cylinder.
• Kerosene to cost Rs 1.50 more per litre.

• Petrol prices to be cut by 1 rupee from 1 April
• Diesel prices to be cut by 50 paise from 1 April

• Cell phones, pagers exempt from countervailing duty

Individuals who were pinning their hopes on the Union Budget 2002-2003 for a fiscal respite have been let down. Instead of being provided with tax relief they have been burdened all the more.

Most of the taxpayers were expecting an increase in the basic exemption limit, which has been stuck at Rs 50,000 since the last four years. However, this year again it was ignored, as has been standard deduction. The taxpayer will be taxed at the current levels of 10%, 20% and 30%. Individuals having taxable income less than Rs 50,000 will not be liable to tax.

Rather than doing away with the 2% surcharge, a surcharge of 5% has been introduced citing national security. This translates into an effective tax rate of 31.5% at the highest slab as against the current 30.6%. For example, an individual having taxable income of Rs 2,50,000 will be paying a tax of Rs 51,450 as against the current Rs 49,980 i.e. an increase of 1,470. Individuals having an income upto Rs 60,000 are exempted from this surcharge.

Says Rajesh Gupta, partner, KPMG, "There has been absolutely no relief for the tax payers. Tax slabs remain the same so does the standard deduction. This will create adverse reactions as the tax burden has increased. Adding to the woes is the slabs introduced in the tax rebates. This will cause more heartburn. Had this been accompanied by the lowering of income tax rates things would have been simpler. With no rebated over Rs 5,00,000 people would be dissuaded from making investments in instruments specified under Section 88."

Again this year too women taxpayers have not been given any incentives. Also ignored this year are senior citizens.

Under Section 88, tax rebate can be claimed for amount invested in certain instruments specified in the Income tax Act. The present rate of tax rebate is 20%. But this budget has categorised rebates into various slabs. People having taxable income up to Rs 1,50,000 can claim a rebate of 20%, for Rs 1,50,000 to Rs 5,00,00 the tax rebate will be 10% and over and above Rs 5,00,000 there will be no tax rebate. Assuming that an individual falling in the 1.5-5 lakhs invests the entire Rs 80,000 to avail of the 20% tax rebate. Under the current provisions he could get 20% rebate ie a rebate of Rs 16,000. As per the Budget he can now get a rebate of 10% i.e Rs 8,000. The special rebate of 30% for persons having taxable income upto Rs 1,00,000 will continue. The adverse impact of categorisation of tax rebate will be that the investor will shy away from instruments which are liable to tax rebate.

With the interest rate cut on small savings, the individual finds himself between the devil and the deep sea. Left with virtually no investment avenues where he can get better yields, he has to rework on his investment options. Though it was widely expected that the rate cut would be around 1%, the actual rate cut has been 0.50% as against 1.5% in the last budget. This rate cut is applicable to RBI Relief Bonds also. The interest rate on RBI relief bond was 8.5%, which post-budget stands at 8%. Further, a ceiling of Rs 2,00,00 per year has been introduced on these bonds. A cut in the interest rates on small savings will lead to a round of cuts in bank deposit rates. Private sector banks offer around 8% rate of interest on fixed deposits for tenures of more than 1 year.

People in the lower income tax bracket have been spared as far as valuation of perquisites is concerned. Last year, valuation of perquisites were on cost basis to employer except in the case of cars and houses. In the Budget 2002, no perquisites will be taxed for the assessment year 2002-2003. In case of employees whose taxable salary excluding perquisites is up to Rs 1,00,000. Employers have been given the option of paying tax on perquisites on behalf of the employees.

Consumer items have become more expensive. The LPG cylinder, which cost approx. Rs 227 will now be dearer by Rs 40. So does kerosene the cost of which increases by Rs 1.50 per litre. Subscribing to the local cable operator will attract a service tax of 5% so will availing the services of beauty parlour, health and fitness clubs, rail travel agents, fashion designers and dry cleaning services. For availing a life insurance policy, the consumer will have to pay a service tax. On the flip side, cell phones and pagers will be exempt from countervailing duty. The prices of diesel and petrol will come down marginally from 1 April 2002.

The limit for tax deduction for interest paid on housing loans currently stands at Rs 1,50,000. This has been left unchanged. It was widely expected that the limit will be raised to Rs 2-2.5 lakhs. Another expectation was the upward revision on repayment of principal amount of housing loan from Rs 20,000 to Rs 80,000. This too wasn't considered given the fact that in a metropolitan city owning a flat or is an expensive proposition.

Investors investing in mutual funds will have to pay a tax of 10%. This was earlier paid by the mutual fund as distribution tax. Comments Suraj Kaeley, Vice President-Sales & Marketing, Templeton Mutual Fund, "The budget has made the dividend income from mutual funds, taxable in the hands of the investors. This has been bit of a dampener. The sweetener has gone but the cake is still there. With the overall interest rates of other investments coming down, mutual funds will continue to be one of the key investment avenues. The investors will definitely realise that mutual funds are the right place as far as the management of risk is concerned."

From an individual's point of view this budget has hit the salaried where it hurts the most. He now has to bear the brunt of decreasing yields on tax saving instruments, increased surcharge, categorsiation of rebates, payment of service tax and tax incidence on dividend received from mutual funds.

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