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Tuesday, March 20, 2012

Indian Union Budget 2012: The Impact on Common Taxpayer


Finance Minister Pranab Mukherjee indeed had a tough job doing the balancing act between macro economic factors and interests of the masses. However, Budget 2012 has come up particularly hard-hitting for the common man. While overall prices are likely to go up, tax reliefs are not as expected. The incremental cash outflow on account of a blanket hike of 2% in Service Tax and Excise is likely to more than offset the small incremental savings from revised income tax slabs for most income brackets. It is interesting to note that the FM has completely failed to address rising prices and has instead presented an inflationary budget.
Mukherjee has rolled forward the deadline for implementation of the Direct Tax Code indefinitely, but has promised an early implementation. Citing the delay in DTC recommendations by the Parliamentary Standing Committee, he expressed his inability to incorporate the recommendations in the Union Budget. Against earlier estimates of a basic exemption limit of Rs. 2.5-3 lakhs, the FM has made a token increase to Rs. 2 lakhs, benefits for senior citizens remaining untouched. The distinction between male and female taxpayers below 60 years of age has been removed. These taxpayers have been clubbed under the ‘general’ category. The proposed income tax slabs under Budget 2012 are as follows:

General taxpayers below 60 years
0 – Rs. 2,00,000
Nil
2,00,001 – 5,00,000
10%
5,00,001 – 10,00,000
20%
10,00,001 and above
30%
Senior Citizens above 60 years but less than 80 years
0 – Rs. 2,50,000
Nil
2,50,001 – 5,00,000
10%
5,00,001 – 10,00,000
20%
10,00,001 and above
30%
Very Senior Citizens above 80 years
0 – Rs. 5,00,000
Nil
5,00,001 – 10,00,000
20%
10,00,001 and above
30%



Deduction under Section 80C is retained at Rs. 1 lakh against an expected increase to Rs. 1.5 lakh.

To promote investments in equity markets, a new scheme called Rajiv Gandhi Equity Saving Scheme is launched for taxpayers whose annual income is below Rs. 10 lakh. 50% of direct investments by new retail investors will be deductible. The maximum eligible amount is Rs. 50,000, i.e. the maximum allowable deduction is Rs. 25,000. The securities will be subject to a 3-year lock-in period. The scheme is targeted at almost 1.5 crore people below the income bracket of Rs. 10 lakh, who do not have demat accounts. While the lock-in period is designed to check market volatility, it may or may not make much sense to the small investors. Most experts believed that the Securities Transaction Tax (STT) will be abolished. The FM, however, stopped at a 20% reduction. STT on delivery is reduced from 0.125% to 0.1%. IPO process is also proposed to be simplified to attract investors from small and mid-sized cities.

To provide relief on the healthcare front, Budget 2012 proposed extension of concessional Customs Duty of 5%. Six life-saving drugs have been made duty free, while duty is reduced in case of a few classes of drugs and supplements. Imported medical equipment will also get cheaper. Preventive health checkup of up to Rs. 5,000 will be deductible under a new provision.

Minor relief on interest income is extended to savings bank account holders. Interest up to Rs. 10,000 will be exempt from income tax.

There is little to cheer for existing homeowners and prospective buyers of residential property. Investors were disappointed as the much awaited hike in deduction for interest on home loans under Section 24(b) of the Income Tax Act did not materialize. Budget 2012 retains the 1% interest subvention on home loans up to Rs. 15 lakh raised for property worth up to Rs. 25 lakh, implying little relief to residents of big cities where average property prices are way above this limit. The Budget has introduced a Credit Guarantee Trust Fund to facilitate better flow of credit in the housing market, but is unlikely to provide any relief to the homeowners in terms of pricing. As a result, the measure will fail to have any effect on demand. Construction services for residential property and low-cost mass dwellings are exempted from service tax. On one hand, the FM seemed to be promoting affordable housing with measures like reduction in withholding tax on ECB for low-cost housing from 20% to 5% and increase in investment-linked deduction of capital expenditure from 100% to 150%. On the other hand, the blanket increase in Service Tax and Excise will increase the cost of components and other services related to housing. This will eventually increase the property prices across the board. Much to the ire of the market participants, Mukherjee ignored the demands to declare the real estate sector as ‘industry’. The move would have salutary effect on the raging prices and eventually on demand. The overall effect of Budget 2012 will be inflationary, which means the RBI will continue with the high interest regime. This in turn means the housing credit will remain expensive. It is difficult to understand what this budget aims to achieve for the realty market, which is already plagued by plunging demand and significant inventory of unsold homes across the country.

Experts may welcome the blanket increase in indirect taxes, but the common man is likely to feel the effect significantly. Budget 2012 introduced a blanked increase of 2% in Service Tax and Excise. This implies most of the things will become costlier unless exempted or taxed at special rates. Right from utility bills to expenses on dining out will go up. Mobile bills and DTH satellite services will be subject to higher rate of Service Tax. Duty has been increased on automobiles, commercial vehicles, white goods, FMCG & homecare items, cigarettes/bidis, tobacco, pan masala, packages food, unbranded jewelry, imported cars and cycles, imported DG cameras, imported gold bars/coins, imported gemstones, and travelling. On the positive side, mobile phones, branded silver jewelry, LCD/LED panels, matches, low range footwear, and writing instruments will become cheaper. During the budget speech, Pranab Mukherjee gave clear indication that Service Tax will ‘accelerate’ in the time to come. Currently, service tax forms almost 11.5% of total tax revenues for the exchequer. With the introduction of the negative list, all services will become taxable unless specifically mentioned in the list. If Budget 2012 has it, only 10 services will be exempt going forward as compared to 88 currently. The widening of tax base will significantly increase aggregate cash outflow for the consumers.

Travelling, whether local or otherwise, will become more expensive due to a host of newly introduced proposals. Air travel will be taxable at a higher rate of Service Tax, while fee paid to travel & passport agents will come under the tax net. Commuting by cab will become dearer and so will using transport hired for tourism. Apart from the higher fare proposed by the Railway Budget 2012, the FM has done his job by bringing AC and first class train travelling under the Service Tax net.

Personal care and lifestyle services, including those provided clubs, parlors, and gyms will be taxed at higher rate. One-off use of sports, pool, and library facilities will also become taxable.

Education is kept out of service tax net. The details of the newly proposed Credit Guarantee Trust Fund are not clear yet, but it is designed to ensure easy credit availability to the students. The Fund guarantees 90% of loans up to Rs. 4 lakh and 80% of loans between Rs. 4 lakh and Rs. 7.5 lakh. As the new scheme implies lesser risk to the lending banks and institutions, education loan rates are expected to come down in due course.

Budget 2012 did not impose any subsidy cuts or hike in fuel prices. The Finance Minister acknowledged that some subsidies are inevitable, but clearly stated the intent to bring down the burden of subsides to effect tax reforms. The target is to cap subsidies at 1.7% of the GDP over next 3 years. In the current year, the percentage is expected to be just under 2.2%. Mukherjee also hinted towards an increase in fuel prices through ‘Executive’ decisions.

Budget 2012 gives away Rs. 4,500 crore in additional tax benefits, but takes away Rs. 45,940 crore in incremental taxes. This implies that the taxpayers will pay 10 times of what they get! The common Indian is bearing the burden of rampant corruption and the ever swelling corpus of black money in the economy. So far, apart from some lack luster measures to check black money, the FM has announced introduction of a white paper on the issue. The present Government has completely failed to control corruption in the past and has drawn a lot of flak for its inaction. Now, it remains to be seen, with political compulsions on the edge, where the policy measures reach. Till then, the people will have to contend with the fact, “What Government gives, it must take away first”.

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