The Budget and you

The Budget affects the way we earn, spend, save and invest, but its heavy jargon often makes it difficult to understand how it impacts us. We simplify the text, as well as the context, to help you grasp it.

     Print Edition: July 23, 2009

The Budget affects the way we earn, spend, save and invest, but its heavy jargon often makes it difficult to understand how it impacts us. We simplify the text, as well as the context, to help you grasp it.

YOU AS A SPENDER

Customs and excise duties: Generally, a reduction or an increase leads to a corresponding change in retail prices. However, often the benefits of duty cuts are not passed on to the consumers because the manufacturers adjust them against past increases in their costs (including the cost of raw materials).

Export duty: This his is imposed on certain products to reduce exports and increase their supply in the domestic market. Look out for such duties on items like rice and wheat.

Additional customs duty: Imposed over and above the normal customs duty. It is calculated on a cumulative basis; if the landed price of the product is Rs 100 and customs duty is 30%, then the additional duty is calculated on Rs 130, not Rs 100.

Cenvat: It was introduced to ensure a gradual transition to a single central value-added tax (VAT). On top of this, there are ad-valorem rates in three slabs. The overall impact on the price of domestically manufactured products is a combination of both these taxes.

Service tax: Levied on the services we avail of. In the past few years, the list of taxed services as well as the tax rate has expanded. This is especially important because all service providers simply pass on the tax to you.

YOU AS A TAXPAYER

Income tax: Raising the basic exemption limit or expanding the tax slabs reduces your tax burden. There has also been a demand for restoring the standard deduction.

Deductions: The various deductions under Chapter VI-A, including Section 80C and Section 80D for medical insurance, help cut tax. Raising the investment limit under these sections reduces your tax outgo.

Exemptions: Certain expenses, such as the interest paid on housing and education loans, are eligible for tax deduction if the assessee fulfils the requirements. The deduction given to housing loans has especially helped in boosting the real estate sector.

Fringe Benefit Tax: Employers pay fringe benefit tax (FBT) on the value of the perks they offer to employees. After it was introduced four years ago, many employers changed their salary structures.

YOU AS AN INVESTOR

Securities Transaction Tax: The securities transaction tax (STT) is a major cause for concern for day traders, whose daily turnover can run into several lakhs of rupees. Not a worry for long-term investors.

Dividend Distribution Tax: Many investors in debt-based mutual funds don’t know it, but they actually pay a tax every time they get a dividend from their fund. The DDT ranges from 12.5% for bond funds to 25% for liquid funds. Its reduction means higher returns for investors in debt funds.

Short-Term Capital Gains Tax: The 2008 budget raised the tax on short-term gains from equities and equity funds from 10% to 15%. A cut in this tax helps improve sentiment, though long-term investors aren’t affected.

EEE or EET: Investment options like PF, PPF, ELSS funds and life insurance are exempt from tax at investment, growth and withdrawal stages. A shift from the exempt-exempt-exempt (EEE) system to exemptexempt-tax (EET) can change the way we invest.

 

  • Rs 1,08,359 cr was the contribution to the exchequer through excise duties in 2008-9, a drop of 15% over the previous year.
  • Rs 65,000 cr was raked in by service tax in 2008-9. Experts estimate this figure to climb to Rs 2,00,000 crore by 2011.
  • Rs 6,466 cr was the collection from the 2% education cess and 1% higher education cess, which are levied on all taxes.
  • 33.3% is the corporate tax rate in India, higher than the global average of 27%. Exemptions bring the effective rate to 20%.
  • Rs 1,23,967 cr was the collection from personal income tax in 2008-9, a 9% rise over the previous financial year.
  • 36.6% is the contribution of direct taxes to the total revenue collected by the government in a year.
  • Below 3% is the contribution of the fringe benefit tax to the total direct tax collection in a year.
  • 14% is the effective personal income-tax rate in India. Deductions bring this down further to around 10%.
  • 36.9% was the dip in the collection from the securities transaction tax in 2008-9 over the previous year.
  • 3.26 cr is the number of individual assessees who filed their income tax return in 2008-9.
  • Rs 3,260 cr is what the government foregoes in revenue for every Rs 1,000 given in tax relief to each assessee.

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