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Budget '04: What's in it for me?

A N Shanbhag | July 10, 2004

What's in it for me? This is the basic question on everyone's mind every year as the Budget unfolds. Unfortunately, the answer is: not much. And whatever there is may not be good news. Let's examine the main provisions.

Income up to Rs 100,000 exempt

The main benefit comes to the lower income group in the form of Section 88D, a new tax rebate. No one with taxable income up to Rs 100,000 will be required to pay any income tax any more. This proposal purports to give relief to 1.4 crore (14 million) assessees out of 4 crore (40 million).

While everyone will file his return according to the current tax slabs and tax rates, and compute his taxable income and the tax payable, anyone with a taxable income of up to Rs 100,000 (before the Section 88, 88B and 88D rebates) will have his Income-Tax liability automatically rebated. However, for those whose total income is above Rs 100,000, the old rates and slabs continue.

Long-term capital gains tax is history

The long-term capital gains tax on securities stands abolished. Before you start cheering, the same is being replaced by a turnover tax of 0.15 per cent, to be paid by the purchaser.

Simultaneously, the short-term capital gains tax has been drastically reduced from a maximum of 33 per cent to 10.2 per cent. This move seeks to put local players on par with foreign institutional investors who used devices like the Mauritius route to evade capital gains tax.

Some questions that arise from the above amendment that require immediate clarifications:

  • Capital losses, if not set-off fully in the current year, can be carried forward (c/f) for eight years. What of those who have existing c/f long-term capital loss? For, as per the existing provisions, c/f long-term capital loss can be only set-off against long-term capital gain.
  • Short-term gains cannot be used in such cases. Now, investors would necessarily have to incur some long-term gains, say in real estate etc., in order to be able to net off the c/f loss. Else, the entire loss stands forfeited.
  • The primary reason for not allowing the netting off of long-term loss against short-term gains was on account of the fact that the short-term gains were taxed at a higher rate than the long-term gains. But now that there is no distinction, it is hoped that set-off would be made freely available.
  • The exemption for long-term gains is provided by a new section, Section 10(38), for gains arising out of securities sold on a recognised stock exchange. What about mutual fund units? When you redeem the units, it is the MF that buys it from you. In other words, you don't sell the units on a recognised stock exchange. Is long-term gains tax payable? Then there are certain units that you can buy on the stock exchange. If you sell these back to the MF (to take advantage of a possible arbitrage opportunity), are you expected to pay tax twice?

Turnover tax robs the investor of the opportunity to plan his taxes by way of setting off capital losses against gains and choosing the instrument to sell and timing his sale with the market indices.

Service tax woes

Increasing direct tax rates can be political suicide. The way out seems to be introducing taxes through the back door. Service tax is nothing but an extra tax (albeit indirect) that you and me have to pay. It directly increases our cost of living.

Every year, more and more services are brought into the net and the rate keeps on getting augmented. This time the same has been raised by 2 per cent from 8 per cent to 10 per cent plus the education cess.

Realise that this tax is payable on the turnover and not on income. And when you put it down in cold numbers, the full enormity of it strikes you. Lets take a basic back of the envelope calculation.

Say a service provider charges you Rs 100 while his expenses are Rs 60. He pays tax of 33 per cent on his income of Rs 40, which works out to Rs 13.20. Now, he also pays the service tax of 10 per cent on Rs 100, which works out to Rs 10. So what we have is a total tax of Rs 23.20 on an income of Rs 40. This is 58 per cent.

That you bear the service tax is of no consequence to the government as long as it gets its 58 per cent. Add the education cess and the rate climbs to 59.16 per cent.

Education cess

Tax, called by whatever name, still remains a tax. Cess is the latest euphemism conjured up by the government after surcharge. A universal 2 per cent education cess is applicable for all taxes across the board including Income-Tax. This is over and above the already existing surcharge.

This device of cess/surcharge works better for the government than imposing a direct tax increase as it works like a sugar-coated pill. Secondly, you cannot save it by using tax saving devices. Surcharge and cess, cleverly are leviable on the net taxes payable after using all tax saving measures offered by the Act.

Small savings untouched

Thankfully, small savings rates remain the same. If you think about it, we are actually cheering inaction. A special savings scheme is to be launched exclusively for senior citizens yielding 9 per cent per annum.

The Varishta Bima Pension Yojna, which was also yielding 9 per cent will stand discontinued. The new savings schemes merely seek to substitute something which existed anyway in terms of the Yojna.

Moreover, the Yojna was available from age 55 onwards whereas the new scheme may be applicable only to senior citizens, which the Act defines to be of age 65 and above. However, the details are awaited.

To sum

These then are some of the highlights of Budget '04. There are some other measures, which we shall touch upon next time. One can almost forecast that sooner rather than later, the differential between administered rates and the market rates would be pared down. However, when that would happen is anybody's guess. Meanwhile, this Budget seems to take more than it gives.

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