Personal tax - Time for individuals to celebrate

“In addition to the increase in the basic threshold limit, the Finance Minister has made changes in the slabs. This will definitely increase the take-home salary of an individual” — Amitabh Singh

Millions of individuals waited with bated breath to hear whether the Finance Minister would dish out some sops to them in his direct tax proposals. Hitherto, the individuals did not have much to cheer, as the Finance Minister had maintained status quo in his Budget proposals in the last two years. This year, being the last Budget under this government, there was an increased expectation from everyone. Individuals were delighted to hear the Finance Minister announce an increase in the threshold limit for exemption and changes in the slabs. Some of the important features of the Budget 2008 that are worth a mention are:

India growth story: The India growth story was the talking point in the Finance Minister’s speech. The estimated growth rate for 2007-08 has been pegged at 8.7 per cent and the drivers of growth continue to be “services” and “manufacturing”. As in the previous Budgets, the primary focus of the Finance Minister was on agriculture, health and education sector.

The education sector and the health sector got an increased funds allocation of 20 per cent and 15 per cent, respectively in this Budget. Being the last Budget before the elections, there were many popular moves made by the FM.

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One among them was the introduction of the Debt Waiver and Debt Relief Scheme for small and marginal farmers. The government is proposing to give a relief of Rs 60,000 crore to farmers through this scheme.

Increase in the threshold limit: The Finance Minister announced the increase in the threshold limit for all assessees from Rs 1,10,000 to Rs 1,50,000, thus giving a minimum relief of Rs 40,000 to every assessee. In the case of a woman taxpayer, this limit has been increased to Rs 1,80,000 from Rs 1,45,000. In the case of senior citizens, this limit has been increased to Rs 2,25,000 from Rs 1,95,000.

Increase in the slab rate: In addition to the increase in the basic threshold limit, the Finance Minister has made changes in the slabs. The proposed slab rates are:

• Up to Rs 1,50,000.Nil
  
• Rs 1,50,001 to Rs 3,00,000. 10 per cent
  
• Rs 3,00,001 to Rs 5,00,000. 20 per cent
  
• Rs 5,00,001 and above 30 per cent

This change will definitely increase the take-home salary of an individual. In the case of an individual who has a taxable income of Rs 5,00,000 (after considering the deduction available under Section 80C) the total tax liability now will be Rs 56,650 (including education cess of 3 per cent). If we take the pre-Budget tax slabs, the tax liability would be Rs 1,01,970. The savings to an individual is a whooping Rs 45,320. This is definitely a reason to celebrate.

Enlargement of the scope of eligible tax saving instruments: An individual is allowed a deduction up to Rs 1,00,000 on expenditure incurred/investments made on certain tax saving instruments under Section 80C of the Income Tax Act. The Finance Minister has introduced two new tax saving instruments that an individual could consider investing in the future.

These are: Five-year time deposit in an account with the post office and, deposit in an account under the Senior Citizens Savings Scheme.

Increase in the tax rate on shortterm capital gains: Currently, shortterm capital gains are taxed at 10 per cent. As per the proposed amendments, short-term capital gains would attract a tax of 15 per cent. While making this announcement, the Finance Minister stated that the dividends distributed attracted a tax of 15 per cent whereas the short-term capital gains is taxed only at 10 per cent. Therefore, the move to increase the tax rate on short-term capital gains is to bring about parity in the tax rates between the two sources of income. Further, the Finance Minister also stated that this move will encourage the investors to stay invested for a longer term. This may possibly have an adverse impact on the sentiments of short-term investors in the market.

Rationalisation in the provisions of Fringe Benefit Tax (FBT): With a view to rationalise the provisions of the FBT, certain amendments have been proposed by the Finance Minister in his Budget speech. Expenditure incurred by the company on the following items is proposed to be excluded from the ambit of FBT:

• Non-transferable pre-paid electronic meal card provided to an employee to be used at eating joints or outlets
  
• Creche facility for the children of the employee
  
• Sponsorship of a sportsman who is an employee of the company
  
• Maintenance of guest house.

In addition to the above, there are few other changes proposed by the Finance Minister that would be worth noticing. These are:

• Festival expenses: Currently, 50 per cent of the expenditure incurred by the company on festival celebrations is subjected to FBT at the rate of 33.99 per cent. The effective tax rate would work out to 16.99 per cent. It is now proposed to levy FBT only on 20 per cent of the expenditure incurred by the company on festival celebrations. Therefore, the effective tax rate payable by the company will come down to 6.8 per cent. This is a welcome relief to all the assessees who come under the FBT net.
  
• Recovery of Fringe Benefit Tax from an employee: The bill proposes to introduce a specific clarification to state that the FBT recovered from an employee will be treated as tax paid by such an employee in India. This would probably help an international assignee in claiming tax credit for the FBT paid in India in his foreign country tax return. However, one will have to wait and watch to see whether the revenue authorities in the foreign country would consider this insertion sufficient to give credit to an individual. Additionally, it has been clarified that the FBT paid by an employee will not be entitled for any refund or a credit against the tax liability on any other income in India.
  
• Filing of Fringe Benefit Tax Returns: The filing of FBT return is advanced from October 31 to September 30. This move is line with the advancement of the tax return filing deadline for corporate assessees and assessees subject to tax audit.
  
• Welfare measures—reverse mortgage scheme: The Finance Minister had in Budget 2007 introduced, through National Housing Bank, the concept of Reverse Mortgage Scheme for senior citizens. This is a popular scheme in many developed countries. Under this scheme, senior citizens get cash flows from their own house by mortgaging it with the bank. The bank would at the choice of the owner of the property pay either a lump sum amount or an amount at periodic intervals. The owner will continue to enjoy dual benefits by getting a regular stream of income from the bank as well as staying in his own house. On the death of the owner, the amount would be returned to the bank either by repaying the amount or by sale of the property to the bank.

The Finance Minister has clarified two of the tax issues related to this scheme. He has stated that the mortgage of property will not give rise to any capital gains in the hands of the owner. The income received from the bank will also not be taxable in the hands of the owner.

This is a welcome move and will help senior citizens to augment money for their living. On the whole, it has been a populist and a non-controversial Budget. Everyone has some positives to look for in this Budget. The individual taxpayer will be happiest of the lot as he would have more money at his disposal.

Amitabh Singh Partner & Leader Global Mobility & Employment Taxes, Ernst & Young