K(h)elkar 's Recommendations. Review on Union Budget

Disclaimer : Since I did not find a suitable head to post this review ... I have done it here which seemed the most appropriate.

Its high time the Indian Financial Honchos realized the necessity to simplify  the tax structures. A Simple English word salary has various meanings in different contexts in this magnanimous Income Tax Act. Poring through the numerous sections, clauses & provisos , at the end of each budget one finds that a new section has been created by adding an alphabet as a suffix to an already existing long section number.The layman always gets lost in the hedge maze of the Tax act .One fine day the then FM will find that all the existing combinations of alphabets have been exhausted. I don’t think this alphanumeric section game has been tackled by Kelkar but he surely has made few suggestions. Whether to implement these or no is Finance Minister’s call. The Finmin has created a TASK force for suggesting some tax reforms so as to simply the complex Indian Tax  Structure. Mr. Vijay Kelkar, heads this  TASK force.

His recommendations are a step in the right direction but as always it is the middle salaried class that gets hit in the bargain as has been seen in the past two budgets. Even the finmin has not greeted this report well as it would do no good to enhance the party’ s popularity. Students will be the only beneficiaries as it will simply tax laws. Tax structures should be simple but not at the cost of the salaried class always. A survey indicates that only 10% of those who are liable to pay taxes pay them properly. The finmin needs to device methods to bring non tax payers into the purview & not over burden the salaried class.

The impact on the corporate world is mixed. The various incentives in the form of incentives, deductions  u/s 80, 10A & 10B etc have been reduced or removed. Depreciation would restricted to a maximum of  that allowed as Companies Act. However on the other hand, distribution tax has been abolished. The corporate tax rates have been reduced to 30% & 35% for domestic & foreign corporates respectively. Also Minimum Alternate tax & wealth tax have been abolished.

There are more of negatives than positives for the salaries class from this report.

Positives :

Ø The basic exemption enhanced to Rs.100, 000/- & there shall be only two tax slabs for personal income viz; Rs.100, 000/- to Rs.200, 000/- @15% , Rs. 200, 000/- to Rs.400, 000/- @ 20% & anything in excess of Rs.400, 000/- shall be taxed at the marginal rate of 30%.

Ø Dividend income shall be tax free in the hands of the shareholders nor will the companies be subject to distribution tax.

Ø No long term capital gains on equity.

Ø Ceiling on Sec 80G (10% of Gross  Total Income) be removed.

Negatives :

Ø No standard deduction.

Ø No separate rates for long term capital gains.

Ø Most deductions u/s 80 viz 80D, 80DDB, 80E, 80G etc removed & converted into tax rebates & also limiting the maximum rebate available to much lower than what is permissible.

Ø Sec 80L pertaining to interest income deduction abolished.

Ø Tax rebates u/s 88, 88B (senior citizen rebate) & 88C (non senior working women rebate) abolished.

Ø The exemptions u/s 10 pertaining to interest income on bonds , securities, debentures etc have been eliminated.

Ø The deduction in respect of interest on housing loans will be removed in a phased manner from Rs.100, 000/- in AY 2004-5 to Rs.NIL in AY 2006-7.

Exemptions would be available to a middle class Indian  if he can prove that he is handicapped or permanently disabled where he will be eligible for the 80DD or the 80U benefit since these have not undergone any change. We in India don’t have any social security schemes. By getting rid of the Sec 88 & Sec 80L, a person will not save anything for his life post retirement. The age old  motive of inculcating the saving habit gets defeated. By removing long term capital gains on equity is an incentive to invest in equity but with the current trend of scams & bearish market the common man will not look at equities.

This report partially speaks of what the finmin wants, just that they wouldn’t want to implement the same on an immediate basis. The report is just a warning bell of things to come in the near future. The poor Common man may soon hear the Taxmen sing the famous Beatles Song which goes like this …

Let me tell you how it will be

There's one for you, nineteen for me

'Cause I'm the taxman

Yeah I'm the taxman !

Should five percent appear too small

Be thankful I don't take it all

'Cause I'm the taxman

Yeah I'm the taxman !

A salaried class individual has just the one thing to say to the K(h)elkar & the finmin “Quit playing games with my Sal”