The annual Budgets should normally be a statement of government finances. However, customarily, in our country, the Budget has become a forum where the government also declares its intended taxation and fiscal policy for the year.
This year, however, could be an exception. The proposed new Direct Tax Code, having been delayed for over two years now, would in all probability be implemented from 2013. So there is really no point in ringing in big ticket changes on the taxation front for all of just one year.
Also, with the GDP growth slowing to 6.9 per cent, the economy isn’t doing too well. Rising input costs, tight liquidity conditions, high interest rates and the combined central and state fiscal deficit upwards of 10 per cent, not to mention the recent UP assembly elections debacle – the headroom that Mr. Mukherjee has is extremely limited. So it will be interesting to see how the FM walks the tight rope.
That being said, if the Finance Minister indeed desires the upcoming Budget to be a memorable one, he would do well to pay special attention to the salaried class. I have said it before and I will say it again - it is unfathomable why governments, one after another, irrespective of their party or politics, turn a blind eye to this significant constituency. In fact, it is this only constituency that prepays its taxes to the government month in month out through the system of TDS. These would be –
* Reinstate standard deduction. Homeowners / landlords get a 30 per cent standard deduction. Businessmen can set-off every expense that they incur to earn income. Then why treat the salaried differently?
* Transport allowance deduction for the commute between home and the work place has remained at an absurd level of Rs 800 per month. This is almost insulting to the employee.
More From This Section
* Then there is the issue of deduction for medical expenses. Spiralling health care costs are a reality and there is no system of government sponsored health plans. In such circumstances, having a paltry limit of Rs 15,000 in which the employee is expected to cater to the medical expenses of his entire family borders on the farcical.
* The government wants to encourage education. However, education allowance for children has remained static for over twelve years now at Rs 100 per month per child for a maximum of two children (earlier it was Rs 50). Ditto for hostel allowance at Rs 300 per month per child. The tuition fees deduction is included in an already overcrowded Sec. 80C. For many taxpayers, statutory payments like provident and superannuation contributions, home loan installments and insurance premiums make up the limit. There is no room left to claim the deduction for fees. A separate deduction for the same would be welcome.
* There is actually one area where the salaried are better off than self employed people. Or more precisely, those self employed persons who stay in rented places. Most of the salaried get HRA and the related HRA deduction. But if a self employed person were to pay rent, the deduction available to him is a meagre Rs 24,000 per year. Most people pay this much rent (if not much more) per month!!
Higher Tax Exemption limit likely
Moving on to issues that are more generally applicable, the basic exemption limit (income below which tax is not payable) that stands at Rs 1.80 lakh currently may be increased to Rs 2 lakh. Consequently, the income level beyond which the tax rate applicable is 30 per cent may be enhanced to Rs 10 lakh from the current Rs 8 lakh. However, in view of the fiscal and revenue constraints that are before the government, the tax rates are expected to remain constant.
Service Tax
Like it is done every year, more services, hitherto exempt, are expected to be brought under the ambit of levy of service tax. A high inflation environment however, may lead the government to desist from reinstating the service tax rate to 12 per cent. Readers may remember that in the third stimulus package unveiled in February 2008, the service tax rate was brought down from 12 per cent to 10 per cent. Bringing it back to its earlier level would be the easiest way in which the government could augment its finances. However, service tax, though an indirect tax, directly adds to our cost of living. Expenses on almost all amenities such as telephones, electricity, restaurants, transport, credit cards etc., are subject to service tax. As this service tax is passed on by the service provider, in effect, it is the common man who bears it. Any increase therein would further add to the burden of the aam aadmi – something the government may wish to avoid especially in the current environment.
Tax deduction on interest on home loans could be hiked
The Rs 1.50 lakh deduction on interest payable on home loans has been constant for a long time. In the meanwhile, property prices, across the country have skyrocketed. Doubling the limit to Rs 3 lakh would not only make this deduction more meaningful but would also result in providing a boost to the housing sector.
Increasing Sec. 80CCF limit
Taxpayers get a deduction of Rs 20,000 under Sec. 80CCF for investment in infrastructure bonds. In the current context, Rs 20,000 is deemed to be too low. It is common knowledge that India needs infrastructural development to continue and further boost its growth. This in turn requires long-term funds. Consequently, a move that will be win-win for all is to enhance the limit of Sec. 80CCF to Rs 50,000 at least.
To Sum up
Apart from the above there are a few other issues such as applicability of exemption on capital gains to buybacks and open offers, taxation treatment of derivative transactions, distinction between a trader and an investor (as tax treatment for both differs) etc., that have long been left unaddressed. These are essentially legacies of previous years’ budgets where rules were changed but certain indirectly affected constituents of the system were left out. Also there has been speculation that deposits held by resident Indians in banks located abroad could attract wealth tax. As a part of the drive against the parallel economy, in the very least, reporting details of such investments in one’s tax return could be made mandatory.
What will actually pan out only time will tell. However, when it does, watch this space for a comprehensive analysis.
The writer is Director, Wonderland Consultants