It is an intriguing context under which the new United Progressive Alliance government will present the Budget on July 6. On the one hand, it is Pranab Mukherjee's first Budget in his new role as the Finance Minister and he would most certainly want to bring about a feel good effect for the taxpayer.
However, given that the combined central and state fiscal deficit is upwards of 10 per cent, the headroom that he has is extremely limited. Given this background, let us see what we can expect this year from Budget 2009.
Well, for starters it must be said that last year's rejig of tax rates far exceeded expectations. Not only was the basic exemption limit raised from Rs 1.10 lakh to Rs 1.50 lakh, but also the slab rate for the maximum tax rate was actually doubled from Rs 2.50 lakh to Rs 5 lakh. Given this, we do not expect any more leniency on this front.
On the other hand, however, tax by any other name remains a tax. Increasing tax rates was never politically popular. Therefore, a concept called surcharge was mooted in 2001. Four years later, the surcharge remained put, however, a 2 per cent cess was introduced and was declared to be temporary in nature. Then this 2 per cent cess was increased by a percentage point. So now, not only do we pay the basic tax, we also pay a surcharge on the tax and a cess on the tax and the surcharge!
We strongly feel that this surcharge must be given a farewell party.
On the deductions front, there is a strong demand for the Sec. 80C limit of Rs 1 lakh to be increased. Today, all kinds of tax saving investments consisting of 24 items, ranging from bank and post office deposits to tax saving mutual funds to PPF and life insurance qualify for the same Sec 80C deduction.
The list is so big that one does not have to make an effort to reach the limit. Unfortunately, there is no differentiation made between long-term savings such as provident fund, PPF, life insurance, housing loan repayments etc., and short-term investments - both sets of investments qualify for the same amount of deduction. There may be a case for encouraging long-term commitment of funds by offering such investments an extra tax incentive.
Yet another way in which the government may augment its finances is by reinstating the service tax rate to 12 per cent. Readers may remember that in the third stimulus package unveiled in February 2008, the service tax rate was brought down from 12 per cent to 10 per cent. Service tax, though an indirect tax, directly adds to our cost of living.
Expenses on almost all amenities such as telephones, electricity, restaurants, transport, credit cards etc are subject to service tax. As this service tax is passed on by the service provider, in effect, it is the common man who bears it. Any increase therein would mean an increase to be borne by the common man.
Then there is the proposed EET system of taxation hangs like a Damocles sword. First mooted two Budgets ago, so far there is a deafening silence on this count. Once the EET regime is operational, all tax saving investments such as PPF, NSC, ELSS, Life Insurance etc would be taxable at maturity.
So effectively, what the government is telling us is that we are going to tax your PPF, NSC, ELSS etc. But we can't tell you when. We won't tell you to what extent each instrument will be taxed. We cant even say for sure whether existing investments made already, prior to this announcement will also be taxed or not. If you have invested in any of these instruments but not claimed the tax deduction, will the proceeds still be taxed? We prefer to stay silent. Well, it is about time this silence is broken.
Last but not the least, if Mukherjee indeed desires the Budget to be a memorable one, he would do well to pay special attention to the salaried class. It is unfathomable why governments, one after another, turn a blind eye to this significant constituency.
In fact, it is this constituency that prepays its taxes to the government month-in-month-out through the system of TDS. It is said that a good government should treat its citizens as customers. In which case, the salaried should form the list of the most important customers - those who not only pay up but prepay their dues year after year. So, if there are five things that Mukherjee can do to this year to bring a smile his customer's face these would be
Reinstate standard deduction. Homeowners / landlords get a 30 per cent standard deduction. Businessmen can set-off every expense that they incur to earn income. Then why treat the salaried differently?
Transport allowance deduction has remained at an absurd level of Rs 800 per month. This is almost insulting to the taxpayer. There is an urgent case for tripling the limit to Rs 2,400 per month in the very least.
Given spiraling property prices, the ceiling on interest deduction of Rs 1.50 lakh is once again not in touch with reality.
All perks, almost without exception are taxable. Those that aren't have been brought under the ambit of Fringe Benefit Tax (FBT). As FBT is payable by the employer, in effect those perks too have ipso facto either disappeared or are counted as a part of the employee's pay package (cost to the employer). Those that have remained are structured in such a way that it is ultimately the employee who bears the FBT. Since the collections from FBT have not been spectacular to begin with, there is an urgent case to dilute or even discontinue FBT.
Finally there is the issue of deduction for medical expenses. Spiraling health care costs are a reality and there is no system of government sponsored health plans. In such circumstances, having a paltry limit of Rs 15,000 in which the employee is expected to cater to the medical expenses of his entire family borders on the farcical.