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The Budget, Taxes and You
February, 18th 2010

With the budget just a week away, practically every industry has come up with a wishlist for what they'd like. We won't know till Feb. 26 how many of these wishes will materialize -- apparently things can change a lot in the last few days.

I joined the bandwagon to look at what might be coming that could affect individuals like you and me. A lot of it has to do with the finance minister's plans for taxes, both direct and indirect.

Here are some expectations and their relevance for you:

Expectation: A roadmap for the introduction of Goods and Services Tax

What it means: The government is in the process of abolishing various taxes that are levied on goods and services that we consume and replacing it with the Goods and Services Tax. It would be levied at both the national and state level, and would eliminate various central taxes as well as state taxes, such as the value-added tax and services taxes.

There's still debate, particularly between the central government and the states, about how this tax will work and what the tax rate will be. Tax lawyers and consultants estimate it could be anywhere between 12% and 20%.

It's not possible for this tax to be introduced by the government's target date of April 1, 2010, says Sanjeev Sachdeva, partner, indirect tax, at Luthra & Luthra Law Offices of New Delhi. However, Mr. Sachdeva expects that the budget speech will refer to it and possibly set a fresh date for the rollout, most likely before the end of 2010.

Why you care: Most experts believe that having a single new tax will bring about efficiencies in the supply chain of goods, help lower or remove tax evasion, and ultimately reduce the cost of the end products we buy.


Expectation: An increase in the central excise and service tax

What it means: The excise tax is a tax on the manufacture or production of goods, ranging from coffee and pharmaceuticals to refrigerators and cars. Similarly the service tax is levied on services we use daily, like mobile phones and cable service.

Both these taxes had been cut last year as part of the government's efforts to boost India's economic growth. The general excise duty went to 8% from 10% and the service tax was cut by two percentage points to 10%. Many manufacturers and service-providers passed on the cuts by reducing the price of their products, spurring consumption.

That has worked, as the economy has been growing steadily over the past few months. Now the government might say, "let's revisit the concession," says Aseem Chawla, partner, tax practice, at Amarchand & Mangaldas & Suresh A. Shroff & Co., a Delhi law firm. Mr. Chawla expects the excise duty to go back up to 10% and the service tax to 12%

Why you care: These tax increases can pretty quickly increase the price of cars and consumer products.


Expectation: Some guidance on the Direct Tax Code, and possibly some rules that could pave the way for its implementation

What it means: The government wants to scrap the existing income tax law and replace it with a new law called the Direct Tax Code. It had planned to introduce this by the fiscal year starting April 2011 but its various provisions are still being debated. One proposed rule under the new law is that a deduction for making certain types of investments be increased from 1 lakh rupees to 3 lakh rupees. Currently, individuals can get this exemption by investing in some types of mutual funds or buying life insurance policies.

The new tax code would reduce the list of such tax-savings instruments by removing mutual funds and market-linked insurance policies from the mix. Not surprisingly, the fund and insurance industries are resisting.

Experts hope that the finance minister will share more details in the budget and perhaps take some measures to lay the groundwork. "It's basically the uncertainty which is killing all of us," says S.R. Patnaik, partner, direct taxes, at Luthra & Luthra.

Why you care: The new tax code will require you to think differently about your tax planning and investing.


Expectation: Some tax breaks for individuals.

What it means: We all want more tax cuts but most likely we won't see much in this budget. That's partly because the government wouldn't tinker with existing tax provisions if it plans to replace the entire law anyway.

Still, some people expect small tax breaks as a way to offset the impact of the recent high inflation, or just to keep voters happy.

Pankaj Mathpal, a financial planner in Mumbai, expects that the "basic income tax exemption" will go up. This is basically the amount of annual income after which we start paying taxes. It is currently 1.6 lakh rupees for men and 1.9 lakh for women taxpayers, and these limits could go up by 15,000 to 20,000 rupees. The government has raised these limits at least twice over the last two years.

Meanwhile, officials in the real estate industry have been lobbying for more tax breaks for individuals who take home loans. For instance, currently individuals can deduct up to 1.5 lakh of interest repaid on their home loan per year, if they live in that home. But builders are pushing for the entire interest repaid in a year to be exempt.

The industry had made a similar request last year, and it's not clear to me why the government will heed it this year so don't get your hopes up just yet. What is more likely is that the government will announce some programs to support low-cost housing, perhaps in smaller cities and towns.

Why you care: If any tax breaks came through, they could lower your tax liability. But don't expect anything major.

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