Don't tax you, don't tax me, tax that fellow behind the tree. Post Union Budget 2002-03, it may appear as if that statement was made by some perturbed soul from India's salaried class, but that has, since time immemorial, been the feeble populist reaction to tax reforms. So, although the Finance Minister did not hike personal income tax rates this time around (although he did hike the surcharge from 2 per cent to 5 per cent), high earners-particularly those in the Rs 5 lakh per annum bracket-will feel the pinch the most.

The biggest heartbreak clearly comes via the meddling with S-88, one of the most popular sections under the Income Tax Act. Until February 28, 2002. Before that, 20 per cent of the money invested in certain securities (like PPF, NSE, NSS, ELSS, and i-Bonds) was allowed as a deduction from the gross taxable income under this section with a maximum deduction limit of Rs 16,000. This meant that you could invest a maximum of Rs 80,000.

That wouldn't make as much sense this fiscal. For, if you earn over Rs 1.5 lakh and under Rs 5 lakh annually, that deduction has been trimmed by half to 10 per cent. And if you earn over Rs 5 lakh, you have to say goodbye to that deduction altogether. You'd have realised the implication of that by now: Your tax outgo is going to burgeon, and your take-home will whittle down. Those in the sub-Rs 1.5 lakh bracket have been spared, but then you have to wonder whether such individuals would be in a position to save up to Rs 80,000. "It is paradoxical that the people in the lower income brackets who cannot save and invest will enjoy greater tax rebate," explains Kirit Sanghvi, a Mumbai-based financial advisor.

Individuals with a rising income now stand the risk of moving into a higher income slab during the year. Take, for instance, a person earning Rs 1.5 lakh. During the year, if the pay packet increases even by a rupee, his net tax outflow will increase by Rs 8,400. Hence, a rise in salary due to, say, a promotion or an unexpected gain will reduce the tax deductions and increase the tax outflow.

Back To The Past

The abolition of dividend distribution tax on corporate and mutual fund dividends is another step backward. "This brings to the fore the issue of double taxation of the same profits," asserts Rajiv Jhaveri, a Mumbai-based ca. Take the case of a company paying tax at 30 per cent. If it pays 100 per cent of its after-tax profit as dividend, the shareholders will pay tax at the rate of 31.5 per cent (assuming the maximum tax slab). This is a clear case of double taxation. It will be a blow to corporatisation as smaller firms will prefer to operate as partnerships .

Also the TDS on dividend income for both companies and mutual funds is unwarranted, especially with no base limit, since it will only increase paperwork for investors with well-distributed portfolios. Dividend income from the equity-oriented schemes will be taxed at a concessional rate of 10 per cent for one more year, but debt funds have no such incentive and will suffer, as they'll be taxed at the normal rates. Equity funds will also benefit as investors get drawn towards the growth options as capital gains tax still stands at only 10 per cent if the units are held for more than a year.

Capital Gains

Until this year, capital losses, whether short-term or long-term, could be set off against any capital gains, irrespective of long-term or short-term. The set-off was available for the same year or could even be carried forward for the next eight years. The latest finance bill disallows setting off long-term capital losses against short-term capital gains. Short-term capital losses can, however, still be set off against either long-term or short-term capital gains.

Taxing The Seller

Another introduction, which flies in the face of the recent trend to simplify tax laws and make them more transparent, is the proposal of deemed sale value. Here the seller has to pay tax not on the capital gains accrued to him based on the sale value, but on the deemed sale value as assessed by the stamp duty authorities. This seems too harsh when one considers that the black money component in real estate transactions has reduced considerably in the recent years.

The underlying tone of all these reforms is distinctly anti-savings. The fm's objective is doubtless to prop up tax revenues, but you to wonder whether there could have been a less complex way of going about the that task.