The Hindu Business Line : Aspirations grounded

The tax proposals in the 2007 Budget is a continuing saga of tinkering that started in 2004, and in spirit and substance run contrary to the professed objective of keeping the tax system simple and the rates stable.

While there are no new taxes, like the ones introduced in the preceding three years, the changes in minimum alternative tax (MAT) is in substance a new levy that impacts businesses that were promised total exemption for a given number of years — software, export-oriented business and other tax-exempt units would now be hit. This, together with the increase in dividend distribution tax, puts paid to any claim of stability in tax rates. The corporate sector may be justified in being piqued.

The changes in the personal tax structure are neither consistent with the professed objective of revamping the incentive structure for savings, nor really meaningful as a relief. The token relief of Rs 1,000 per assessee for income exceeding Rs 1 lakh is farcical, not factoring in the inflation effect on the threshold that was put in place three years back. The other measures neither have a clear philosophy nor direction, in either being significant in providing any relief or fostering simplification in tax calculation.

Cement industry, which is crucial for infrastructure development, will be distressed by the hike in excise duty on the retail price. The administration of this scheme will be a nightmare for the industry, which is just coming out of a long slump. The differential duty regime is a crude way to coerce the industry to keep the prices down. The final nail in the tax proposals is the service tax on rental income (commercial and non-residential) which is bound to add to the already escalating rents, especially in the metros.

The education cess currently in vogue has clearly no accountability inasmuch as there in no direct correlation between the levy and the spends on education and increasing it is unwelcome without a corresponding assurance on its outlay.

In essence, the significant among the tax proposals are clearly detrimental in effect, making the overall impact of the Budget on the productive segments of the economy quite negative.

(The author is Partner, Global Tax Advisory Services, Ernst & Young.)