Direct Tax proposal: Kills incentives to invest - Views on News from Equitymaster

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Direct Tax proposal: Kills incentives to invest

Feb 28, 2002

The finance minister seems to be making a desperate attempt to improve his detoriating tax to GDP ratio. During the year, he, time and again, reiterated his confidence in meeting his tax collection targets. The economic survey seems to have caught him on the wrong foot. To make up for poor finances the finance minister seems to be going too harsh on tax assesses. For starters, the 2% surcharge on income tax has been hiked to 5%, significantly increasing the tax outgo of an assessee. Investors have been put into a double whammy as far as saving instruments are concerned. While, on one hand, the government has slashed the interest rates on small savings instruments, on the other, tax incentives for these instruments has been done away with.

Section 88 of the Income Tax Act, which was an avenue for taxpayers to cut down on tax liabilities, has been rolled in considerably. While individuals earning in excess of Rs 0.5 m will not get any Section 88 benefit, it would be curtailed to only 10% for those earning between 0.15 m - 0.5 m. Thus, most of the small saving schemes would become unattractive for investors. Further, a 5% service tax has been charged on insurance premium.

That's not all. Dividend income from companies and mutual funds, which was hitherto fully exempt in the hands of individuals, would now be taxed on par with his tax bracket. Thus making even equities unattractive.

Looking at the chart above, it seems that the finance minister is betting on an economic recovery during the year. As per initial projections, the government seems to be targeting around 25% growth in corporation tax, which prima facie seems unlikely.

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