"The Budget is essentially growth-centred with a long-term objective. The Finance Minister did not have to hand out tax sops, although he did throw in little tidbits to keep the individual taxpayers from feeling ignored"

For the second year in a row, the Finance Minister has maintained a general status quo in his Budget proposals for individuals. As the individual waited with much anticipation, given widespread rumours of tax rates coming down, the minister delivered his short and crisp direct tax proposals in a manner similar to attending a social 'must attend' function-in and out for just enough time for people to see him but not really feel his presence.

The primary focus of the Finance Minister was on agriculture, development of the rural sector and education. The Finance Minister summed up his agenda thus: "Agriculture must be the top agenda of the policy makers and must hold first charge..."

The Budget is essentially growth-centred with a long-term objective. The intention is to fight inflation with increased thrust on manufacturing and productivity. Of course, the fact that this was not an election year meant that the Finance Minister did not have to hand out tax sops, although he did throw in little tidbits to keep the individual taxpayers from feeling ignored.

But on a more serious note, I did see an absolute conviction in the Finance Minister's efforts at taxing high income earning individuals and giving concessions to low income groups, proposing higher taxes on employee stock benefits and widening the capital gains base at one end and increasing the maximum exemption threshold limit at the other. Also, fringe benefit tax continues to be the key tool, clearly shifting taxability away from the employees to the employer.

The proposals put forth by the Finance Minister are discussed in the ensuing paragraphs.

The Finance Minister has provided a tax concession of Rs 1,000 for all individual taxpayers by uniformly increasing the maximum exemption threshold limit by Rs 10,000 across all types of individual taxpayers. Clearly, each individual will immediately see the pocket getting heavier. But with the corresponding levy of the secondary and higher education cess of 1 per cent, the higher income bracket individuals will be no better off. So, every individual who has a taxable income of over Rs 5,10,000 (for males) will suffer on an overall basis.

Hitherto, the benefit derived by the employees on stock option income was taxed only at the time of selling the shares by the employees and there was no tax payable either by the employer or employee on exercise of the shares/securities, where the stock plan was compliant with the guidelines issued by the government.

The Finance Minister now proposes to bring the benefit arising at the time of exercise of shares/security by the employees within the ambit of the fringe benefit tax. Consequently, the employer will now be required to pay tax at 33.99 per cent on the difference between the fair market value of the shares/security at the time of exercise and the amount paid by the employee. This will significantly increase the overall cost of the employer (as also that fringe benefit tax is not allowed as a deductible expenditure for companies). It should be noted here that the employee will still be liable to capital gains at the time of sale of such shares/security, the cost of acquisition being the fair market value of the shares/security at the time of exercise.

The Finance Minister has also proposed two key changes in capital gains provisions. One is to include personal effects like archaeological collections, drawings, paintings, sculpture, or any work of art, within the purview of capital gains tax. From this, it is clear that the Finance Minister has not missed that high net-worth individuals have recently started increasing their investments in potentially tax-free art objects and paintings.

The other change relates to availability of capital gains exemption on investments made in long-term specified bonds. As per the current provisions, a taxpayer can claim an exemption from capital gains arising from the transfer of a long-term capital asset to the extent such gains are invested in "long-term specified bonds" within a period of six months from the date of such transfer. The Budget proposes to cap this investment amount at Rs 50 lakh in a year.

Again, from the proposals relating to capital gains, it is evident that the Finance Minister wants to come down hard on high income earning individuals.

"There is equity in the Finance Minister's proposals and his efforts to tax the rich and spare the poor. If used for the right purposes, the additional education cess will help us in gearing a larger educated workforce"

Amongst the other proposals, the Finance Minister has sought to increase the deduction under Section 80D towards health insurance premium by an additional Rs 5,000. Further, the Finance Minister also proposes to permit deduction under Section 80E for education loans taken by an individual even for spouse and children of the individual.

On an overall basis, not an exciting Budget proposal. Does this indicate things to come in the future? We can just wait and watch. Hopefully, the Monsoon Session will not have any hidden surprises.

Having said that and in true Indian spirit, there is equity in the Finance Minister's proposals and his efforts to tax the rich and spare the poor. If used for the right purposes, the additional education cess will help us in gearing a larger educated workforce in future and measures like taxing stock income gains under fringe benefit tax and expansion of the capital gains base will achieve more parity in net wealth of individuals.

Amitabh Singh is Tax Partner, Ernst & Young