<b>Debashis Basu:</b> FM offers olive branch to taxpayers

Coming on the heels of the note ban and the disruption that awaits us in the form of Goods and Services Tax, investors, middle class and small businessmen heaved a sigh of relief with a budget that has something to please all, is fairly logical in its approach, and has very few nasty surprises. In fact, for the spectrum of small businessmen and salaried professionals, the budget has a lot of good stuff.
 
From a reduction in the period of holding that qualifies for capital gains tax, to imposing limits on spending, lower income tax at the first slab and attempting to close the loophole of manipulating shares to exploit the long-term capital gains (LTCG) exemption, the budget has made a lot of sensible moves.

 
The most fascinating change in Budget 2017 has happened with regard to taxing LTCG from listed shares. Under the provisions, equity shares bought on or after October 1st, 2004, would attract capital gains tax if securities transaction tax (STT) was not paid on the purchase. The explanatory memorandum has clarified that bonus shares and those purchased during initial and follow-on public offers, on which we pay no STT, would not attract this provision. So, who does this target? It attempts to plug the menace of ramping up illiquid and closely-held listed stocks over a year and booking tax-free income as LTCG. This practice is rampant, as I have described in a recent article, and I am glad the FM has taken steps to plug it, especially when the capital markets regulator had failed to do the job.

 

While the FM has not made too many changes in taxation, the ones he has proposed, seem sensible. For one, the base year for calculating indexation benefit would now be April 1st, 2001. This will reduce taxable gains. The provision of a holding period for immovable property for the long term has been reduced from three years to two years, although this creates three different definitions of ‘long-term.’ For listed shares, it is three years, for immovable property, it is two years and for other assets, it is three years. There is scope for further rationalisation in this regard. Other reforms include a single-page form for filing returns for non-business income below Rs 5 lakh and a five per cent tax rate, (down from 10 per cent) for the first slab of income.

 
The FM has also announced that there would be no scrutiny for the first time taxpayer, unless there are high value transactions triggered by the system. This should encourage better compliance. In general, the FM’s approach, unlike his predecessors, seems to offer a carrot rather than a stick.
 
For instance, although he reeled off statistics to show how few Indians pay taxes (1.2 crore cars get sold and some 2 crore people travel abroad every year, but only 7.6 million declare income above Rs 5 lakh), he did nothing to catch them and bring them into the net. 

 
However, it is important to read the fine print before coming to definitive conclusions regarding the tax provisions. For instance, here is something the FM did not mention. Tax expert Nikhil Vadia points out, “Interest exemption on property interest for a second home is no longer available for deduction from taxable income”.
 
Overall, the FM has managed to leave a favourable first impression in a tough year. This is perhaps why the market surged as soon as the speech was over. Now, for the fine print.
  The writer is editor, Moneylife