Budget Impact: Taxing times for the rich

Going by Budget 2016, the Finance Minister appears to have implemented the Economic Survey’s suggestion of taxing the rich in several ways. Here’s a look at how some of these Budget proposals lead to higher income tax and indirect tax on goods and services, for this class of tax payers.

The most direct impact came in the form of increase in surcharge (leviable on income tax) from 12 per cent to 15 per cent on taxable income exceeding ₹1 crore. This leads to an effective tax rate of 35.535 per cent from the earlier 34.608 per cent.

Yet another additional tax has been imposed on dividend income earned from domestic companies, if this exceeds ₹10 lakh a year. The taxpayer will have to pay 10 per cent tax on the total dividend. It is worth noting that such tax shall be levied in addition to the dividend distribution tax (DDT) which will continue to be paid by the companies.

The Budget has mandated collection of tax at source at 1 per cent on purchase of upper segment cars (exceeding value of ₹10 lakh) and purchase of goods (other than bullion or jewellery) in cash (exceeding value of ₹2 lakh). While this amount will be regarded as tax paid by the individual buyer and available for offset against the annual income-tax liability, the same will result in additional cash outflow at the time of purchase.

With the government’s stated intent to reduce demand for physical gold, redemption of gold bonds issued under the Sovereign Gold Bonds Scheme 2015 will be exempt from any capital gains tax. Further, if these bonds are sold before redemption, the long-term capital gain will be computed after accounting for indexation. Similarly, deposit certificates issued under the Gold Monetisation Scheme 2015, are also being promoted by not only exempting the interest from tax but also excluding the certificates from capital gain tax. These changes should make these schemes more attractive and tax-efficient.

Coming to indirect taxes, motor vehicles will become costlier due to the additional levy in the form of infrastructure cess of ranging between 1 and 4 per cent, depending on the fuel and engine composition of the vehicle.

Purchase of jewellery (excluding silver jewellery, other than those studded with diamonds and other precious stones) will now be a more expensive proposition as excise duty of 1 per cent would be imposed without input credit, or 12.5 per cent with input credit.

Prices of electronics items are also likely to move higher, as they would be hit by a customs duty hike to 7.5 per cent (presently nil) on e-readers, mobile phone chargers, adapters, speakers, wired headsets and telecommunication equipment.

Further, branded readymade garments of ₹1,000 or more will now be subject to excise duty at 2 per cent without input credit, or 12.5 per cent with input credit.

As regards some other FMCG products, prices of soft drinks and packaged water may also witness an upward movement, courtesy an excise duty hike from 18 per cent to 21 per cent on aerated sugary drinks and mineral water. For the general consumer, the most significant impact in indirect taxes is an additional 0.5 per cent to the existing service tax rate of 14.5 per cent in the form of “Krishi Kalyan cess”, making services dearer on a resultant higher rate of 15 per cent as this is applicable to all services, except some listed under negative list.

In a step further to collect tax on unaccounted money from all taxpayers, a new Income Declaration Scheme, 2016 (scheme) is introduced as part of the proposals in Budget 2016.

The scheme provides taxpayers a one-time opportunity to come clean by declaring their undisclosed income and assets acquired from such income.

The undisclosed income reported under the Scheme would be subject to tax at a flat rate of 30 per cent with surcharge and penalty at 25 per cent of the tax amount, respectively.

Thus, the taxpayer would need to shell out 45 per cent on the amount of undisclosed income and achieve immunity from prosecution under the Income Tax Act, Wealth Tax Act and the Benami Transactions Act subject to certain conditions.

From an overall perspective, one may say that the Finance Minister has attempted to provide support to the low-income taxpayers and to the rural sector while collecting additional taxes from those who can afford it.

Alok Agrawal is a Senior Director with Deloitte Haskins & Sells. Manish Shah and Azhar Sakriwala are Senior Manager and Assistant Manager, respectively.

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