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Taxpayers take it on the chin - Views on News from Equitymaster
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  • Feb 28, 2002

    Taxpayers take it on the chin

    The Union Budget for FY03 did not prove to be a non – event, unfortunately. Unfortunate, not for industry but for you and me i.e. the taxpayers. So be prepared for a nasty surprise when you sit down with your chartered accountant to do your tax planning for FY03.

    The Union Budget, which held out promise for much needed reforms, met only the most modest of expectations. There were the usual developments on the agriculture and industry front – including credit availability, more institutions, better infrastructure and more subsidies (for agriculture). The scope of service tax was expanded to cover more services. There were several developments on the infrastructure front, especially power and rural roads.

    There was but one development that was really path breaking from the point of view of the Indian Industry. This, pertaining to administered interest rates (more on this below).

    Probably, the only other surprise was the development pertaining to capital account convertibility, under which the government has made it more attractive for non-resident Indians to bring money into the country.

    What did the Union Budget leave the taxpayers with? Let’s take this a step at a time –

    • Income by way of dividends and profit distribution by companies and mutual funds will now be taxed in the hands of the investor. The rate applicable will be not 10%, but the tax bracket under which the individual falls. For example, if you are in the top most tax bracket, you will have to pay a tax of 30% on such receipts.
    • Avenues for earning returns on government savings schemes, which offer assured returns, will now yield lower returns. The government has reduced all administered rates by 0.5% and in coming years, returns will be restated to reflect the yields on government paper in the secondary market. Also, a cap of Rs 200,000 has been put on investments in the much popular RBI Relief Bonds.
    • The deduction under Section 88 (under which we invest in life insurance, PPF etc) will now depend on the income of the individual. While Individuals with an income in excess of Rs 500,000 will lose this benefit altogether, those with incomes in between Rs 150,000 and Rs 500,000 will get a deduction of only 10%.
    • Finally, while the tax rate applicable remains same, there is a surcharge of 5% as against only 2% earlier. So, the effective tax rates stand increased from 10.2%, 20.4% and 30.6% to 10.5%, 21.0% and 31.5%.

    So while on one hand deductions have reduced, on the other, tax rates have moved up (the tax brackets staying where they are, there is no adjustment for the rising cost of living). In fact, with subsidies having come down (on LPG for instance) the cost of living will rise pretty dramatically.

    The government has in effect transferred its deficit to the balance sheet of the taxpayer.



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