The Telegraph
Since 1st March, 1999
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Short on delivery, like predecessors

Usually the annual budget exercise runs a typical course — it is high on promise but falls low on action. This time, things were ever so slightly different. The enormous dialogue and debate generated by the Kelkar committee had raised people’s hopes and expectations. However, true to the form of his predecessors, our debutant finance minister fell woefully short on deliverance.

The common man may just be feeling a little bewildered — the budget has nothing to cheer about but, at the same time, there is nothing much to complain about either.

Interest on housing

Pre-budget there was a fear that concessions on housing may be tempered down. Thankfully, that has not happened and the Rs 150,000 interest deduction on purchase or construction of a house property stays put. The stipulation requiring finishing construction of the house within three years has been dropped.

For the salaried class

Earlier, the standard deduction was 33.33 per cent with ceilings in various slabs depending upon the salary earned. Now the standard deduction has been fixed at 40 per cent of salary or Rs 30,000, whichever is less, for a salary up to Rs 500,000. For those who earn more than that, the ceiling is lower at Rs 20,000.

The exemption on any amount received under a voluntary retirement scheme was up to Rs 500,000. However, this had to be received at one go. Now, even where the money is received in instalments, the exemption would be available.

Senior citizens

Senior citizens get a special deduction under Section 88B of Rs 15,000. Now it has been raised to Rs 20,000. They can request for no tax deduction at source if tax on their total income after rebates works out to nil.

Pension reform

This was indeed badly needed. LIC is to introduce a special pension policy called the Varishta Pension Bima Yojna, which promises 9 per cent a year. Those over the age of 55 years would be eligible to receive the pension.

Dividend tax

In the hands of the investors, dividend has been made tax free. However, there is a 12.5 per cent distribution tax imposed on the issuer.

Do note that the issuer in this case is a mere conduit, a pass-through. It is actually the investor who has to bear the tax as the issuing company would pay that much less to the investor.

Clearly, large shareholders and promoters would be the ones who benefit the most. These are normally rich people who belong to the highest tax bracket.

Dividend income, which would be quite substantial in their case, was hitherto taxed at the highest rate. Now they would be required to bear just a 12.5 per cent tax. On the other hand, the small investor whose dividend income would have been in all probability covered by Sec. 80L has to bear the full brunt.

Equity mutual fund schemes have been given an exemption for one year from this dividend tax. Wonder why these half-measures' Why only one year' Equity investments are meant to be long term and the investor needs to know what is the tax consequence of the investment that he makes today.

In spite of these changes, Sec. 80L has been maintained at Rs 15,000.

Long-term capital gains tax-free

Capital gains on equity will be tax-free from April 1. Actually, this was a good time to have introduced this measure. Tax can be paid if there are gains in the first place. Nowadays it is only the most astute or the very lucky who make gains in equity. In which case, they deserve the exemption fully.

But this begs one question. Can capital loss still be set off' It is a well-established fiscal principle that deductions cannot be claimed on exempt incomes.

Last budget, it was stipulated that short-term gains cannot be used to set off long-term loss. Such loss can only be set off against long-term gains. Now even long-term gains would not be available for set-off.

Note that it is only the long-term gains on equity that are exempt. Gains on other long-term assets like property are still taxable and consequently available for set-off.

Last, if gains on equity are tax-free, why not those on equity mutual funds' These are, after all, pass-through vehicles and for all practical purposes represent the collective investments of the investors.

Small savings rate cut

One could almost hear the collective sigh of investors all over when the finance minister declared that interest rates on all small savings instruments such as PPF, NSC and relief bonds would be reduced by a further percentage point.

A large portion of the governmental outflow is on account of interest. Therefore it suits the government just fine to talk down interest rates. Users of money similarly are ecstatic. They too will be borrowing at lower rates. It is only the savers who are dismayed.

They are told that inflation is low and the real rate of return is still quite healthy. The only problem is reality is different and the pressure on interest rates is northwards. I wonder how the economy will react to this illogical reduction.

Direct tax rate unchanged

Almost everyone was willing to bet that either direct tax rates would be brought down or the basic threshold of tax exemption would be raised. Nothing happened.

Service tax

The service tax has been increased from 5 to 8 per cent, further increasing the burden on the common man. Ten more services have been added, making this tax all the more pervasive.

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