Do you really gain from the Budget?

Though tax slabs have been slightly raised, tinkering with duties have nullified their impact

The most significant aspect of Budget 2012 is not what it did but what it did not do. Coming as it did right after the recent assembly election debacle, one almost expected the government to use the budget platform to dole out huge subsidies and other fiscal prolificacies in a bid to woo back the electorate. That the FM refrained from doing so, is in itself the best news in Budget 2012.

Significantly, the Finance Minister in his budget speech announced that the government will take steps to implement the DTC at the earliest. One cannot help but get the feeling that the tinkering and fixing exercise that Budget 2012 eventually turned into is a precursor to the new Tax Code.

Sample this, a rejig in the tax slabs and aligning them with those proposed under the yet to be introduced Direct Tax Code (DTC) means a lower tax outgo of Rs 22,000 for those earning income above Rs 10 lakh. However, for persons earning up to Rs 8 lakh, the benefit is a marginal Rs 2,000.

Lesser tax means more disposable income. However, this would be somewhat gets nullified by the increase in the service tax rate from 10 per cent to 12 per cent.

Also almost all services (barring 17 in the negative list such as trading of goods, renting of residential property, education and so on) are now going to be taxable. Service tax, though an indirect tax, directly adds to our cost of living. Expenses on almost all amenities such as telephones, electricity, restaurants, transport, credit cards and so on, are subject to service tax.

As this service tax is passed on by the service provider, in effect, it is the common man who bears it. Any increase therein further adds to the burden of the aam aadmi - something the government could have avoided especially in the current environment where general price levels remain elevated. So, though you pay lesser tax on your income, you end up paying much more for the services that you use.

Take look at some of the tax related announcements that were made.

Tax Deduction at Source (TDS) on sale of immovable property
With effect from October 1, 2012, it will be obligatory for the buyer of a property at the time of making payment to the seller, to deduct tax at source at one per cent of the sum, if the sale consideration exceeds (a) Rs 50 lakh where the property is situated in urban areas (b) Rs 25 lakh in semi-urban, rural areas and so on.

There will be no registration of the transfer of such property unless the buyer furnishes proof of deduction and payment of TDS.

Questions arise about how this proposal is to be implemented, especially in cases where the seller is planning to save his capital gains tax liability by buying 54EC bonds or a new residential property. In other words, where the seller will not be liable to pay any tax by virtue of reinvesting the capital gain amount in approved assets, how and why would the buyer deduct tax? And if he doesn't do so, will the property still get registered?

Rajiv Gandhi Scheme
The FM mentioned in his Budget speech that a new scheme called Rajiv Gandhi Equity Savings Scheme is to be introduced where retail investors having income below Rs 10 lakh would get a 50 per cent tax deduction on Rs 50,000 invested directly in equities. A lock-in period of three years is proposed on such investments. However, so far this is just a budget announcement - no details have been announced.

Once again, one wonders about the reasoning behind this proposal. Why encourage the small investor (remember this is only for the person having income below Rs 10 lakh) to directly participate in the stock market? Couldn't this benefit have been offered for investing in mutual funds instead (on the lines of ELSS funds)? It would have been far safer at the same time achieving the same result.

Reporting of foreign assets through return of income
Currently, no income tax return needs to be filed if the income of the taxpayer is below the basic threshold. The Budget 2012 proposes to amend this provision by providing that filing of the tax return would be compulsory where the resident individual has any asset or bank account located outside India. Particularly noteworthy is the fact that this amendment is applicable retrospectively for FY 11-12 i.e. it is applicable for the current financial year.

Deduction in respect of interest on deposits in savings accounts
Savings bank interest up to Rs 10,000 would be exempted from tax in the case of an individual taxpayer and Hindu Undivided Family. Interest on fixed deposits (FD) is specifically not covered. Again one wonders why? Interest is interest, from whichever source. Why encourage people to keep funds idle just to avail of the tax deduction when the same could have put to better use. Long term investments like in a FD benefit not only the investor but also the economy.

To Sum
There are certain other measures such as exemption for senior citizens from paying advance tax, Securities Transaction Tax cut to 0.1 per cent from 0.125 per cent previously for delivery based equity transactions , inclusion of preventive check ups under Section 80D up to Rs 5,000 and so on - but these will only have very minor benefits and will not be too substantive.

The writer is Director, Wonderland Consultants.