Not a bad Budget for you and me

Taxes: Really,not a bad scene

The effective tax for the vast majority of the nation is now less than 4 per cent. For income below Rs 5 lakh,if one were to take advantage of standard tax deductions viz. Section 80C,the tax payable would be Rs 20,000 on an income of Rs 5 lakh. That’s 4 per cent effective tax. Consider additional benefits under 80CCF,conveyance,medical reimbursements and the new equity sche-me; effective tax falls below 3 per cent. Add HRA benefits and the tax payout percentage falls even further.

For someone earning just a shade below Rs 10 lakh,the effective tax rate is 9 per cent or lower. For someone earning Rs 20 lakh or thereabouts,the effective tax rate is 18 per cent or lower. Further take into consideration benefits under section 24,i.e. home loan interest payments,employee reimbursement benefits for salaried and depreciation benefits for self employed,the effective tax rates would crash even lower. Against this the service tax that we would bear is just 2 per cent higher.

Rajiv gandhi equity scheme: Perhaps a masterstroke

Rajiv Gandhi Equity Scheme can have many far reaching benefits. It is one of a kind,radical and a highly progressive proposal. The government is giving multiple messages via this move.

1. Asking people to think “equity investments”. Prima facie,tax incentive will prompt investments. People will have to compulsorily hold onto for 3 years and by the time the investor gets his act together to sell this,it would be an average four years. People will make good profits as a result and will get motivated to consider equities as a viable option and will understand that equity investment is not gambling.

2. The government is teaching people the benefits of long term investing and the fact that equity investment is one of the best ways for wealth creation. Once people realise that there is far higher possibility of profit here,they may be motivated to invest far more over time and thereby deepening retail participation in equity markets.

3. This may be a precedence to making announcements that EPF money will need to flow to equities for better returns. Perhaps the stage is being set for mental preparedness towards acceptability of the equity as an asset class.

Even if this is said to be a once in a lifetime opportunity for now,chances are it may be extended further,in the same form or something else,who knows?

The benefits are far reaching.

Tax Aversion: There is tangible action here

1. TDS (Tax Deduction at Source) on property sale: The modus operandi may be a tad more tedious however tax collections will improve and so will compliance. Often payment of taxes when left completely in the hands of the assessee escaped assessment. Somewhere down the line cash components in property deals may reduce and there may be more transparency in the overall transaction.

Though this is enforceable only above a certain specified limit,surely it will help where it matters most.

2. TCS (Tax Collection at Source) for purchase of bullion and jewellery in cash: Who in India does not do this? Tax revenue is the income of the country and thus why should it not improve over time. Our income rises every year; so should the governments’,is it not?

3. We always talk about government not going or not being able to go after the wealthy to collect tax dues. So now it seems there is a clear intention of doing so.

a. AMT (Alternate Minimum Tax): Often business persons would claim various deductions to reduce their tax liability and such AMT was only levied on companies. Now this has been extended to include all types of persons viz.,individuals,association of persons,proprietorship and partnership companies,HUF etc,having income of over Rs 20 lakh.

b. Compulsory reporting of assets held overseas and re-opening of assessments for previous 16 years in relation to such assets will serve as a severe deterrent.

c. Flat tax @ 30 per cent for unexplained money,credits,investment and expenditures.

Will the salaried class now not be glad that the burden of taxes they shouldered in running the country has eased to some extent and efforts are being made to capture transactions that evaded taxes so far?

How the above will be executed is yet to be seen but the intentions are clear and that’s good for now.

Self-employed and SME: Some solid benefits for you

This is a very important section of society that creates ideas,opportunities,employment and dreams for the nation to achieve. Such firms have a need for funds and the cheaper the cost of such funds the better it is for their businesses to grow.

1. Compulsory tax audit for income over Rs 1 crore: This saves a lot of money in terms of fees to accountants,time spent in book-keeping,resource costs and compliance burden. For those whom this is applicable know that it is a great benefit.

2. Exemption of capital gain on sale of residential property for investing/ subscribing to equity shares of a manufacturing SME company for buying plant and machinery. Hence no tax on sale of residential property plus depreciation benefits on plant and machinery to the P & L of the SME for many years.

Kudos to the ministry for finding out such a brilliant way of augmenting the financial needs of SMEs.

a. Albeit it will be the promoters own fund but his company will now have access to funds at zero cost and here’s a robust methodology to invest in one’s own business.

b. A new viable and highly desirable destination for deployment of such capital gain monies has emerged.

c. Many more options may also be possible. This concept can give a whole new meaning to private equity investment. On a very basic “you and me” level,one would be able to do his/ her own little venture funding perhaps. How interesting.

The budget is an important policy statement of the government and need not have dollops of joy for everyone each time it is announced. It should be viewed as the business plan of the country for the next year.

Read,understand,absorb,adapt if necessary and life goes on.

— Author is Director,Transcend Consulting
kartik@transcend-india.com