PERSONAL TAXATION
More pluses than minuses

Union budget 2001-02 brings several changes in direct taxes designed to make the tax administration both taxpayer-friendly and simple. The following are the
highlights:

• Tax rates and slabs retained at old rates.
• All surcharges off except 2 per cent for calamity fund
• No surcharge on incomes upto Rs.60,000
• Enhanced tax rebate of 30 per cent for salaries upto Rs.1 lakh
• All perks, except housing and car, to be taxed on actual cost
• One-by-six scheme extended to all urban areas
• TDS at 10 per cent on all income above Rs.2500 from bank FDs
• 30 per cent TDS on winnings from lotteries and gameshows
• Tax deduction on housing loan interest upto Rs.1.5 lakh
• Section 80L benefits reduced to Rs.9000 from Rs.15,000
• Capital gains reinvested in IPOs free from tax
• All IT refunds payable within one year
• IT returns deadline shifted to 31 July for individuals
• Corporates, one-by-six assessees to file returns by 31 October

So what do these changes mean for the taxpayer and the economy? Broadly, one would say the budget on the whole is growth-oriented. It also encourages, in many respects, the rationalisation of direct tax provisions while also releasing the taxpayer from various administrative formalities.

One interesting provision in terms of the nature of incentives is that the surcharge on income-tax has been reduced across-the-board, with the exception of the two per cent surcharge introduced through an ordinance last month with a view to helping the reconstruction of earthquake-affected Gujarat. Most taxpayers may not mind paying this at all. It is a national cause, and especially since they have been spared the payment of the other surcharges.

The other interesting provision relates to the reduction in the tax on corporate dividend payments and those on income from debt funds. The earlier tax rates on debt/income funds was 22.6 per cent, but now this is down to 10.2 per cent 10.2 per cent. This should compensate to some extent the expected fall in interest rates following the drop in small savings rates by 1.5 per cent. However, it is the existing investor in income funds who would gain the most.

One of the new provisions inserted this year will help develop the primary capital market. The finance minister has decided to exempt investors from even long-term capital gains tax on listed securities and units of mutual funds if the same are reinvested in primary issues. This should help revive the primary markets, making it easier for new companies to raise capital. Profit-making companies maing an IPO will be the best avenues for such reinvestment proceeds.

The relief provided to salary earners upto Rs.1 lakh, by giving a higher tax rebate at 30 per cent under Section 88 (versus the normal 20 per cent), will benefit lower income earners. However, the condition that the said salary should not be less than 90 per cent of gross total income appears a trifle unfair - which means anyone earning income other than salary may not benefit.

Perquisites earned by employees will, however, face stiffer taxation since the tax will now be levied on the actual cost of providing such perks. The only exclusions are company-provided accommodation and cars. Other perks, like provision of garde-ners, sweepers, payment of electricity and gas bills, will be taxed as income depending on their actual costs. This amendment, which will affect high-level company executives, is a move to reduce the complexities of personal taxation and stop the disguising of pay as perks.

The tax on winnings from lotteries, including TV gameshows like Kaun Banega Crorepati and Jeeto Chhappar Phadke, will now be taxed at source at 30 per cent instead of the present 40 per cent. However, this will become effective only from 1 April 2001 (AY 2002-03). This means that all those who have won so far will pay more on their winnings. In a taxpayer-friendly move, the budget has reduced the time limit for making income-tax refunds. The limit is one year, but it is not clear what happens if the refunds are still now available.

Interest rates for late payment of tax dues and refunds under various sections of the Income Tax Act have been reduced to 15 per cent per annum (1.25 per cent per month against 1.5 per cent and two per cent presently). This will become effective from 1 June 2001. Similarly, with effect from 1 June 2001, interest payable under section 244A also stands reduced to nine per cent against the existing 12 per cent. After the judgment of the Supreme Court in the Mahendra Mills case, which said that the claim of depreciation was optional. Section 32 also provides that unabsorbed depreciation shall be carried forward upto eight years. Both these aspects have now been amended. It is now provided that with effect from the year starting 1 April 2001, depreciation shall be carried forward indefinitely and deduction of depreciation shall be mandatory. One can view this amendment as rational though, in any case, the assessee's deduction from various income like export earnings will get reduced.

Apart from these, certain administrative measures proposed under the Finance Bill are noteworthy. One of them is the threshold for deduction on interest which has now been fixed at Rs.2500 against the present threshold of Rs.5000 and Rs.10,000 in certain cases. This will affect banks' fixed deposits. One would consider these to be regressive amendments as it creates a lot of burden on the deductor and harrassment to small income assessees. No doubt such assessees can file Form 15H and get out of this deductions.

The provision requiring tax deduction at souce at 10 per cent on income of commission and brokerage seems okay, but the threshold of Rs.2500 is very low. On the other hand, the finance minister has boldly taken a decision to remove Section 230A, under which no clearance certificate is required for transfer of property above Rs.5 lakh. The dates for the filing of tax returns have been changed, but one is not clear why this has been done. The new dates, which are effective from this financial year itself, provide for the submission of returns by corporate and one-by-six scheme assessees by 31 October. For the rest, the due date is 31 July.

As a measure of rationalisation and simplification, one wonders whether it will benefit assessees having income from house property and now paying tax on 70 per cent of the gross rental income (less municipal taxes) without being allowed any other deductions, except interest on money borrowed for acquisition of the house property. In some cases it may benefit a few assessees, while in some cases it may have negative impact.

(This article has been prepared with help from tax expert Narayan K Varma)