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FM thanks janata, gives bigger slices
July, 07th 2009

Only two things in life are certain death and taxes, said Benjamin Franklin. People dread both. He can't do much about the first but finance minister Pranab Mukherjee did try to ease the burden of taxes by making sure his budget put a minimum of Rs 1,030 extra in everyone's pocket by raising the exemption limit across the board by Rs 10,000 for men and women alike. For senior citizens, the minimum benefit was higher at Rs 1,545.

The savings may be small here but there are big bucks for those in the higher income group (more than Rs 10 lakh). As Mukherjee has abolished the 10% surcharge on tax payable by an assessee with income more than Rs 10 lakh, the effective tax rate has come down from 33.99% at present to 30.9%. This will lead to substantial savings of around Rs 3 lakh for those with incomes of Rs 1 crore.

For male taxpayers, the FM has increased exemption limit by Rs 10,000 (it has gone up to Rs 1,60,000 from Rs 1,50,000). For women, the limit has been increased by the same amount to Rs 1,90,000 from Rs 1,80,000. For senior citizens, however, the finance minister has been a bit more generous in his proposal, increasing exemption limit by Rs 15,000 to Rs 2.40 lakh from Rs 2.25 lakh. This leads to a reduction in tax liability by Rs 1,545 compared to what they paid in 2008-09.

The Rs 10,000 increase in the exemption limit is equivalent to a 6% raise, which is equal to average inflation during the year. That means for entry level taxpayers, the average real income remains almost the same.

The corporate sector wont exactly be rejoicing either. Mukherjee has not met their demand for reduction of corporate tax from 33.99%. In fact, even the abolition of surcharge will not be applicable to this sector.

Pranab Mukherjee, in his speech, said, Tax rates are determined by the size of the tax base; if the tax base
is higher, the tax rates can be lower. He said the income-tax Act is riddled with a plethora of exemptions, which substantially erode the tax base. As tax foregone on direct taxes is higher than direct tax collections, the finance minister did not propose any change in the corporate tax.

Similarly, as education cess is levied for specific purposes, the government has decided to continue with it. The department is likely to earn Rs 7,804 crore from education cess.

Because of the increase in exemption limit of personal income tax, the government will lose Rs 3,500 crore.

Similarly, the abolition of fringe benefit tax (FBT) will cost the government around Rs 10,500 crore. Revenue secretary EV Bhide said the loss in revenue due to the abolition of surcharge, FBT and raising the exemption limit will be equal to the increase in collection due to rise in the minimum alternate tax (MAT) by 5 percentage points to 15%. MAT is paid by corporates on the profit declared in their balance sheet.

The finance minister has also attempted to keep students happy by extending the tax exemption on the interest paid by an assessee on education loan for any course pursued after senior secondary examination. It is estimated that over 5 lakh students will avail of this benefit.

Finance secretary Ashok Chawla has pointed out that the present budget did not reflect the long-term policy of the government. At present, it only touches on those taxes which have been harsh on industry and people such as FBT and CTT.

In the medium term, he said, as reflected in economic survey, which is the projection of Mukherjee's vision, the government wants to move very quickly on tax reforms and put in place the foundation for long and medium-term agenda. While expressing confidence that the country would achieve 7% GDP growth in 2009-10, he said the time was not right to raise taxes.

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