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S. Murlidharan

ON THE direct taxes front, Budget 2003 has come as a damp squib to the middle-class. Leave alone indexing of the tax-free limit to accord with the inflationary forces as is done in the UK, even the more reasonable expectation of upping of the tax-free threshold has not come through.

Yes, senior citizens stand to gain from the increase in the tax rebate to them from Rs 15,000 to Rs 20,000. While nobody grudges them this munificence, the younger ones too deserved sympathy from the Finance Minister.

And all they have got is a modest increase in standard deduction, increase in exemption for income from investments, abolition of tax on dividends and long-term capital gains emanating from listed securities and abolition of surcharge on income up to Rs 8.5 lakh.

One positive thing, which should not go unrecorded, is recognition of education as investment — education expenses on children qualify for tax rebate under Section 88.

The increase in standard deduction, though modest, is not illusory. Deduction of 40 per cent of the salary subject to a ceiling of Rs 30,000 from salary of those getting up to Rs 5 lakh and a flat deduction of Rs 20,000 for those getting more than Rs 5 lakh would benefit low-level employees as well as the high-level ones. It won't benefit the middle-level employees. For the low-level employees, upping of the deduction from 30 per cent to 40 per cent may well pull them out of the tax clutches.

Consider this: A clerk with Rs 80,000 of salary income will break free of the tax net, as his taxable income will plummet exactly to the tax-free limit of Rs 50,000, thanks to the heightened percentage. Similarly, senior executives who were shut out of this benefit would be able to knock off Rs 6,000 from their tax liability now that they get a standard deduction of Rs 20,000.

The abolition of tax on dividend from Indian companies with the concomitant revival of the distribution tax regime takes us back to square one and revives the old debate on the desirability of sparing tycoons and industrialists from tax as well as on the festering issue of double taxation of dividend. A 12.5 per cent distribution tax does amount to double taxation to this extent. Instead of finding a fair solution to this vexed problem of double taxation of dividend, what we are witnessing is a chronic tinkering, with whims and fancies prevailing over cold logic.

While dividend doubtless is doubly taxed, no such thing happens with long-term capital gain (LTCG) from shares. Abolition of tax on LTCG from shares, therefore, is totally unjustified. The Kelkar Committee's argument that LTCG is embedded in the taxable earnings of the company is as specious as it is in defiance of logic. Often the market quotation and performance bear no relationship. In fact, what determines the market price more is the demand-supply equation in the bourses. This entirely unmerited munificence would encourage large-scale migration to the capital gains bandwagon.

Already, dealers are masquerading as investors to beget the tax exemptions and shelters available to LTCG. Now that the Finance Minister has abolished tax on LTCG altogether, there would be mad scramble for this bandwagon.

The Finance Minister deserves kudos for recognising education as an investment though grudgingly (only Rs 12,000 per child subject to a maximum of two children) for the purpose of granting tax rebate under Section 88. This micro management was something which was not warranted.

A ceiling of Rs 20,000 on housing under the same section has roundly been criticised. The new move welcome as it is will face flak for the same reason.

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