The Hindu Business Line : No luck if you cross a `lakh'

IN MY wife's school, there was a collective jubilation by the teachers until I spoiled their party with an unsolicited nugget of information. On the personal taxation front, the Finance Minister, Mr P. Chidambaram, had warmed their cockles as well those of millions of other middle-class taxpayers by sparing those with taxable income up to Rs 1 lakh from the burden of income-tax.

The catch

The caveat, however, is that the slab rates remain as they are. And this is what has come as a damp squib for them. What it implies is that things have not changed for those whose taxable income is in excess of Rs 1 lakh. For example, if a person's taxable income is Rs 1.5 lakh, his tax-free income would be only Rs 50,000 as hitherto, with the income between Rs 50,000 and Rs 60,000 attracting a 10 per cent tax as hitherto and the remaining income of Rs 90,000 attracting 20 per cent tax hitherto. Ditto for a man having income in excess of Rs 1.5 lakh — the first Rs 1.5 lakh would attract a tax of Rs 19,000 as hitherto with the income in excess of Rs 1.5 lakh attracting 30 per cent tax as hitherto. In other words, the tax-free threshold has not been upped across the board. This is as it should be.

If companies and partnership firms can pay tax on every single rupee of their income, there is no reason why well-heeled individuals cannot. If anything therefore the Finance Minister has been kind to them by allowing them to pay tax at nil rate as hitherto on the first Rs 50,000 of their income. The diehard tax-evader will, of course, try to wriggle out of the noose by creating multiple taxable units in such a way that each unit does not have an income of more than Rs 1 lakh. With the tax-free limit doubled, his labours have halved. He would have to create only half the number of units that he was driven into creating under the earlier regime.

On a more serious note however, there is going to be hectic jockeying and manoeuvring all round to push the taxable income below Rs 1 lakh. Middle level employees especially are going to pester their employers to structure their salary in such a way that they slump below the magic figure of Rs 1 lakh. A teacher, for example, getting a consolidated salary of Rs 1.05 lakh per annum can take, say, Rs 600 per month out of this as transport allowance, which is tax-free, and succeed in her mission.

Gift check

It is gratifying to note that the Finance Minister has substantially heeded the advice of those advocating meting out of the same treatment to gifts as is meted out to any other income. He has proposed that gifts from non-relatives in excess of Rs 25,000 would be treated as income.

This hopefully would not only bring the beneficiaries (both real and charlatans) of others' munificence under tax but more importantly would put paid to one of the most fecund money laundering techniques. One only hopes that he takes this move forward to its fruition and not chicken out.

The surcharge of 2 per cent on taxes of all hues, be it income-tax, excise, Customs or service, proposed in the Budget would hopefully be accepted cheerfully by the taxpayers given its end-use — education. One only hopes that the sizeable collection made on this account does not melt into the giant cauldron called the Consolidated Fund of India but is kept aside for the purpose for which it is raised. Indeed, that is the essence and rationale of any cess.

Long-term, short-term

The stock market has gone into an inexplicable depression, if not on a tailspin, hot on the heels of the Budget, though a few sectors that have benefited from increase in the FDI cap and tax sops are looking up. The reason trotted out for the market wearing the mourning ensemble is the introduction of turnover tax of 0.15 per cent.

Hey, what are you cribbing about? Come on, if there is a turnover of Rs 10,000 crore in the stock market over a given period, the turnover tax would be a piffling Rs 15 crore. The sulk is all the more inexplicable in the face of the largesse doled out to investors in the stock market — no tax on long-term capital gains (LTCG) from securities in the secondary market and a soft-tax of 10 per cent on short-term capital gains (STCG) from the secondary market.

This is something which the market itself would not have expected. One is not sure how the communists are going to react to it. Far from wrenching away the tax shelters available to LTCG, as suggested by the Kelkar Committee, the Finance Minister has done the unthinkable — remove the tax itself, thus rendering the shelters redundant insofar as they were designed for LTCG from securities.

Had he proposed to abolish the distribution tax on dividend payable currently by companies declaring dividend, one could have understood, if not endorsed, the move in toto, as that certainly would have avoided double taxation of dividend income. But what he has done is something the investors would not have asked for even in their wildest dreams. Why on earth should LTCG from shares be exempt from tax and why should STCG from shares be indulged with a small 10 per cent tax.

In the wake of these twin moves, more and more dealers would try to get into the investor bandwagon. Besides engendering revenue leakage the move is fraught with grave inequities. Income is income. The Revenue should not play favourites with one category.

At any rate, tax is not the only counter that enthuses or dissuades an investor. Investors look for huge capital appreciation while investing. Tax considerations are only secondary.

(The author is a Delhi-based chartered accountant.)

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