Usually the annual budget exercise runs a typical course -- it is high on promise but falls low on action. This time, things were ever so slightly different.

The enormous dialogue and debate generated by the Kelkar committee raised people's hopes and  expectations. However, true to the form of his predecessors, our debutante finance minister fell woefully short on deliverance.

The common man may just be feeling a little bewildered -- there is little in the Budget to either cheer about but, at the same time, there is nothing much to complain about either.

Yes, depending upon how much you earn, you'll be paying a marginally higher or a marginally lower tax. You may get that extra standard deduction but it didn't amount to much in the first place.

Dividends are made tax-free but there is a distribution tax, so rates on small savings have predictably come down. At the end of the day, therefore, you win some, you lose some.

In any case, let us examine the proposals in greater detail.

Surcharge

The surcharge on income tax was flat at the rate of 5 per cent for all assessees except those having a total income (after all exemptions and deductions) of Rs 60,000 or less.

This was levied for the express purpose of safety of India and there was a promise to withdraw it completely after one year.

Yes, this does stand withdrawn, but only for individuals, HUFs, Association of Persons and Body of individuals with a total income of Rs 8.5 lakh or less.

Surcharge is payable by:

• Those with income higher than Rs 8.5 lakh at the rate of 10 per cent. In their case, the effective tax rate jumps from 30 per cent to 33 per cent.

Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs 8.5 lakh is limited to the amount by which the income is more than that level.

For instance, the tax on total income of Rs 8.7 lakh is Rs 2.35 lakh. Though 10 per cent of this is Rs 23,500, the surcharge is limited to Rs 20,000 which is in excess of Rs 8.5 lakh.

• Co-operative society, firm, local authority and company at the rate of 2.5 per cent.
• Artificial juridicial person at the rate of 10 per cent.

Comments:

I strongly feel that it is injustice to ask an individual to pay a whopping surcharge of 10 per cent just because his income is over Rs 8.5 lakh whereas the companies are required to pay only 2.5 per cent, irrespective of their level of income.

Dividend made tax-free

Dividend received from a domestic company and income distributed by the specified company as defined in the UTI (Transfer of Undertaking and Repeal) Act, 2002 or a Mutual Fund to its unit holders is tax-free from April 1, 2003 onwards. This distribution tax is in addition to the normal income tax payable by the company.

However, this dividend declared, distributed or paid by a domestic company or the income distributed by the specified company or a mutual fund shall be charged to additional income-tax at the rate of 12.5 per cent flat.

Comments:

Tinkering with this area of double taxation has been a favourite sport of the finance ministers since fiscal 1997, when they made dividends from a domestic company tax-free and imposed the additional tax on dividends at the rate of 10 per cent.

In 1999, they extended parallel benefit to income from units of UTI/MFs. In 2000, they raised this distribution tax to 20 per cent (plus the associated surcharge), rolling it back to 10 per cent in fiscal 2001.

Last year saw the deletion of the distribution tax and made the dividend or income taxable in the hands of the investors.

Budget '03 proposes to make the dividends once again tax-free and impose the distribution tax at the rate of 12.5 per cent. One step forward and two steps backwards.

Here, I would like to caution the readers. Last time, when the dividend was made tax-free, everyone scrambled for the dividend paying schemes of MFs.

One has to realise that the growth schemes avoid the distribution tax altogether. Yes, it attracts capital gains tax whenever the units are sold but this tax is negligible.

LTCG on equities exempt

Long-term capital gains arising from transfer of any listed shares and acquired on or after March 1, 2003 but before March 1, 2004 is exempt from tax.

Comments:

The market was disappointed to find that this exemption is not available for shares already held by the shareholders. Moreover, this measure is on experimental basis.

I have an interesting observation to make. Section 48, explanation (iii) which defines 'Indexed cost of acquisition' to mean an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index (CII) for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on April 1, 1981, whichever is later.

Section 49(1) states that where the capital asset became the property of the assessee, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

Now suppose I give a gift of shares purchased by me years ago to my wife on April 1, 2003 and she sells them in the market after a holding period of one year. Surely, she will be able to compute the long-term capital gains by using my cost of acquisition.

These capital gains will be tax-free since the date of her acquisition falls within the above prescribed period. Yes, these capital gains will be taxed in my hands because of the clubbing provisions but being tax-free, I am happy and so is she.

I hope I am right.

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