|"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
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
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
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.
Introduction of secondary and higher education
cess of 1%
in the maximum exemption threshold limit by Rs 10,000
options brought within the purview of Fringe Benefit Tax
of the capital gains base; tax exemption limited in specified
on health insurance premium increased by an additional Rs
allowed for education loans taken by an individual even for
spouse and children of the individual
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