The Hindu Business Line : Sizing up the tax measures in Budget 2008

The bonanza that the Finance Minister, Mr P. Chidambaram, has conferred in the latest Budget on individual taxpayers has surpassed expectations. The exemption limit for attracting income-tax has gone up from Rs 1.10 lakh to Rs 1.50 lakh. This limit is much higher than the exemption limit in the US. But it is still not comparable with the limit in the UK. The rates are claimed to be moderate. In South-East Asia, Thailand applies rates of 5 per cent, 10 per cent and 20 per cent in three slabs.

Slabs and Rates

The corporate tax rates, however, have not been changed. World over, the tendency is to lower the corporate tax rate; the Asia-Pacific average is 30 per cent. However, the Finance Minister has highlighted that the effective tax rate is only 20.6 per cent after allowing for exemptions.

There is something discriminatory about the way surcharges are levied. The surcharge was never meant to be a permanent. The temptation to levy surcharge arises from the Constitutional provision which allows the Union Government to take all collections under the head “surcharge” to its account. It need not be shared with the States.

For several decades there has been the plea to incorporate the tax rates in the Income-Tax Act itself. The way the surcharge operates, it is obvious that it is discriminatory. In the case of individuals with incomes above Rs 10 lakh, a 10 per cent surcharge is levied. In the case of a domestic company, the 10 per cent surcharge is applied on incomes above Rs 1 crore. This applies to firms too.

The differential limits for individuals and non-individual taxpayers in the matter of levy of surcharge leads to obvious discrepancies and discrimination requiring the attention of the Finance Minister.

It has been the declared policy of the Government to remove or limit tax exemptions from the income-tax law as much as possible. Yet, the present Finance Bill continues with more exemptions and incentives. Geographical incentives have been given to hospitals located in rural areas and hotels at world heritage centres. Income from saplings or seedlings grown in a nursery is treated as exempt. Incomes of persons from Sikkim are also exempted.

The Coir Board gets a special exemption. Reverse mortgage will be liable for neither income-tax on incomes received from bank nor tax on capital gains when the property is sold to the bank. Exporters have been hit but they have got no concession.

The Finance Minister continues with the trend he initiated two years back, of introducing innovative new tax measures. The Commodities Transactions Tax (CTT) will henceforth be applied vigorously. This will be the fourth new tax measure introduced by the Finance Minister. The Banking Cash Transactions Tax (BCTT) was an irritant. It had been abolished.

Revenue Raising Measures

Despite the huge giveaway, thanks to the doubling of the slabs, the Finance Minister hopes to increase direct tax collections substantially. This is because of two crucial measures introduced by him this year. The Dividend Distribution Tax (DDT) is levied at 15 per cent. This itself is high and the impact is felt on the average shareholder who does not know that the profits available for distribution have been reduced because of the 15 per cent levy before distribution. The short-term capital gains were taxed at 10 per cent.

The Finance Minister has chosen to equate the rates for short-term capital gains and dividend distribution. Instead of reducing the DDT from 15 per cent to 10 per cent, he has increased the rate of tax on short-term capital gains from 10 per cent to 15 per cent.

The revenue from this measure is bound to be substantial. It may induce investors in the stock market to stay invested for at least for 12 months to escape the tax.

The second major reform relates to the book profits tax. Section 115JB of the Income-Tax Act, 1961 has been amended. The computation of book profits will henceforth be made after including deferred tax and DDT.

This is said to be a clarificatory amendment. It overrules judicial rulings on this issue. The amendment will take retrospective effect from April 1, 2001. The tax department can reopen the assessments from 2001-02 onwards under the amended law.

The Finance Bill continues with the tradition of retrospective amendments and amendments to tide over inconvenient rulings of courts. Some of these amendments are harsh and inequitable — a case in point being the one to curb the powers of the Income-Tax Appellate Tribunal.

(The author is a former Chief Commissioner of Income-Tax.)

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