Certainly Not A “Suit-Boot” Sarkar Budget

On the personal taxation front, there is little for the common man in the budget 2016. The slab rates haven’t been disturbed, but at the same time those in the first slab - 10 percent and are not progressing to the second have been given a small relief of additional Rs 3,000 rebate under section 87A. In other words, if a person has a total income of Rs 5 lakh, the tax he would pay would be Rs 20,000 i.e. 10 percent tax on Rs 2,50,000 (tax free limit stays at Rs 2,50,000), Rs 25,000 less rebate of Rs 5,000. The rebate route has been adopted, lest the small relief applies to everyone uniformly.

Plus, if he is living in rented accommodation and does not get an HRA from his employer, he will save another Rs 3,000 approximately.

But then the Finance Minister has tried to blunt the “suit-boot ki sarkar” charge with fine-tuning of the regime of taxing dividends. As it is, dividend is tax-free in the hands of its recipients, rich or poor, widow/pensioner or industrialist. But it is taxed in the hands of companies paying them by way of Dividend Distribution Tax (DDT) at 15 percent plus.

While this definitely set the exchequer’s cash register ringing merrily, thanks to ease of collection and impossibility of evasion, the regime had a pro-rich bias. An industrialist instead of paying a 30 percent plus tax, if dividend were taxed in his hands, paid (vicariously through his company) only half. But small investors, many of who might not be having income above the tax-free limit or at best having income falling in the first slab attracting 10 percent, willy-nilly have been paying a vicarious tax of 15 percent plus.

The Finance Minister has not corrected the skew against the small investors but has
corrected the skew in favour of the rich substantially. Hereafter, in addition to DDT paid by the company, recipients would also pay a flat tax of 10 percent plus if their total dividend income exceeds Rs 10 lakh. This would bring the tax on dividend for them fairly close to the maximum marginal rate of 30-15 percent vicarious plus 10 percent direct.

This is a fine balancing act - if he were to correct the first skew as well, it would have called for a roots-and-branches reforms of dividend taxation. Jaitley has retained the upside of DDT while righting an important inequity. He has not thrown the baby without the bath water.

The other suit-boot blunting measure is increase in surcharge from 12 to 15 percent for those who have income in excess of Rs 1 crore. The presumptive tax scheme for small traders has been extended to those having an annual turnover not exceeding Rs 2 crore from the hitherto Rs 1 crore cut-off point. The presumed profit for them is 8 percent, which gives them a huge tax leg up vis-à-vis those paying tax normally, given the fact that profit margin at the retail level is very high in India. Chemists, for example, enjoy an enviable 40 percent margin.

Joining the presumptive tax bandwagon now would be professionals with annual fees not exceeding Rs 50 lakh. They would be presumed to have made a profit of 50 percent which seems to be fair enough. No records need to be maintained in either case is support of expenses.

Jaitley has stood his ground and not reintroduced wealth tax that was abolished last year by adding more teeth to the law and making it comprehensive. He hasn’t brought back either estate duty that was suspended in 1985 though his junior Minister Jayant Sinha has been making a strong pitch for it.

The market has another reason to cheer - long-term capital gains tax exemption has not been withdrawn nor has the holding period necessary for making the grade been tinkered with.

The olive branch has been offered to domestic black money holders - come clean by 30th September 2016 and get away with a 45% tax sans penalty and interest. This is also more of a suit-boot jibe-blunting measure than the one born of a genuine conviction that people are going to line up to make a clean breast of their black money, going by past experience.

Sadly, there is no game changer or joker in the pack insofar as personal taxation is concerned.