When Finance Minister Pranab Mukherjee started his budget speech, it looked as if all the proposals would be geared towards the common man, the aam aadmi. Enhanced investments for alleviation of poverty, generation of rural employment and creation of rural infrastructure led to anticipation that the tax proposals would also be along the same lines. This seemed to be the case at first—till, of course, one did a more precise math. It is now clear that the finance minister has performed a careful balancing act that is geared to create both winners and losers.
The increase in the basic exemption limits will save Rs 1,030 per year, or less than Rs 100 a month. Hardly anything to cheer about, but with the abolition of surcharge, the rich, who were being taxed more so far, will have a lot to smile. This is in line with the lower tax rates that the government has been talking about. For instance, a male tax payer, whose total taxable income is below Rs 10,00,000, will save Rs 1,030 per year, which amounts to a saving of barely 0.1% of his income. However, if his total taxable income during the year is Rs 15,00,000, the savings would be Rs 37,595 per year, which is a more reasonable 2.5%.
Before the high-income earners start popping the champagne, here is a sobering proposal: the finance minister has also withdrawn the Fringe Benefit Tax (FBT), and it appears that many of the fringe benefits, including ESOPs, as already proposed, will now be taxable in the hands of the salaried individual, as was the case prior to the introduction of FBT. What this may mean is that the overall tax bill of many individuals may actually go up, even after the removal of the surcharge.
The proposal on the increase in advance tax limit from the existing Rs 5,000 to Rs 10,000 would mean that a taxpayer would be required to make advance tax payments only if the total tax liability, as reduced by the taxes deducted/collected at source, is Rs 10,000 or more. The increase in the existing deduction under Section 80DD—for expenditure incurred on the maintenance of handicapped dependants with severe disability— by Rs 25,000 to Rs 1 lakh, is a step forward, but may not be adequate.
The scrapping the FBT can lead to an adverse impact in some respects. The proposal to treat the employer’s contribution to an approved superannuation fund in excess of Rs 1 lakh as a perquisite in the hands of the employee could lead to potential double taxation— at the time of contribution, and again at the time of withdrawal, if the latter is not in accordance with the tax provisions. The government needs to rectify this anomaly.
The proposal on a simplified tax form is a positive step, which promises to ease the tax laws and get rid of all exemptions over a period of four years. We can only hope that some of these steps will go a long way in alleviating the current rigours of tax compliance. We have briefly discussed some of the key proposals and feel that though none of us have lost anything, only some of us have made any significant gains.
The authors are senior tax professionals with Ernst & Young, India.
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