"This year's budget is directionless" - Views on News from Equitymaster

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"This year's budget is directionless"

Feb 29, 2000

Anil Harish is one of the leading legal experts on matters relating to taxation, property transactions, and the Foreign Exchange Regulation Act.

He is a partner of D. M. Harish & Co, one of India's leading legal firms. Anil has addressed conferences on a wide-range of subjects such as the budget, foreign exchange laws, property laws, and taxation in Bombay, Delhi, Dubai, Madras, Muscat, Pune, and Singapore. Anil assisted his father - the late D. M. Harish in writing India's definitive guide to taxation laws: a 10,000-page 8-volume magna opus that is also available on CD-ROM.

In an interview to equitymaster.com he spoke about the tax implications of the Union Budget

EQM: How do you find the individual Assesses placed now after all these changes that have been made?

Mr. Harish: An individual non-business assesse is going to be marginally affected. The rate of tax goes up slightly on account of the surcharge. Some deductions do go up such as in the case of senior citizens and women, but for non-business assesses from what was mentioned there is not much other difference. However there are some benefits for business assesses even though they may be individual or partnership firms. Last year when the law was amended it was only corporate bodies which were entitled to get a tax exemption in respect of exports of entertainment and software that has been extended to individuals also now.

But the major difference is going to be in capital gains. From what the finance minister announced if the person sells an asset and makes a capital gain then he will have no longer the facility of investing in mutual funds. The mutual fund industry is going to be affected very gravely, because the real flow of funds is coming in on account of capital gains. People were attracted to mutual funds out of tax benefits given to mutual fund industry and also by the phenomenal returns that the mutual funds were getting, and therefore it was beneficial both to the individuals and the mutual funds. It seems now to me that the finance minister has seen the mutual fund growth so fast that he doesn't like that, that he wants this to go to NABARD. This will make a very tangible difference to the equity markets because money is not going to come into mutual funds on account of capital gains tax exemption, and will go only to NABARD. While NABARD can do whatever it can, its objectives are limited because the funds cannot flow into different areas of equity and that can affect the capital markets. This lack of flexibility is going to be bad for the individuals and the markets.

One change that has been introduced is a good one. Currently u/s 54 S of IT Act if an individual makes a capital gain on sale of shares or on sale of land or jewellery, then he can use this money to reinvest in a house provided he does not already have a house. The law has been amended so that even if the individual owns a house he can make a capital gains and roll that money over to buy another house and avail of these benefits on capital gain. So this expands the area of capital gains on the one hand, whereas mutual fund amendments narrows its scope.

EQM: So this could have a positive impact on the housing sector?

Mr. Harish: Yes, but to a limited extent. The benefit is not going to be substantial because if buy a second house you still have to pay stamp duty and realty rates are not going up. The individual will probably prefer to put it in the stock market, where the returns will be higher in comparison.

And this is what makes me feel that it's a very diffused kind of budget. In some places there is an exemption given, such as liberalisation in favour of assesses, but on the other hand the FM said that the law is complex on account of exemptions and he wants to scale it down. So he talks of giving more exemptions and then he talks of withdrawing them. Therefore, I feel there is no sensible direction.

EQM: Speaking of exemptions, the exemption limits for direct taxes have not been raised. It's stuck at Rs 50,000. That is negative isn't it? Also, the additional surcharge…

Mr. Harish: Yes I agree, it should be kept in pace with the inflation. Also though the 5% additional surcharge will bring in some more revenues, its not a good thing to keep changing rates of tax, as it causes problems all around and hence does not send the right signal.

EQM: Do you think it is going to lead to tax evasion?

Mr. Harish: No, I don't think so. In the last three years the taxes have gone down and tax collections have gone up, showing an inclination on part of assesses to pay taxes.

EQM: Issue of ESOPs hasn't been tackled. Any Comments?

Mr. Harish: Though it has not been mentioned in the budget speech, but may be it is tackled in the provisions of the budget.

EQM: So why is there so much need for this?

Mr. Harish: When a person sells an asset he is ready to pay a capital gains tax, but when you buy an asset in this case shares in the company, even at a concessional rate, you got only a notional gains. As you have not made money on that actually, you still have to pay capital gains on this notional gain. Only when you exercise that option of actually selling it and encashing your gains should you pay tax. Therefore, the present law in this context is not sensible at all.

EQM: How will the hike in dividend tax affect dividend payments by companies?

Mr. Harish: It does affect substantially. The FM tried to compare it to an interest situation wherein the persons get interest from the company has to pay taxes at substantial rate. Actually it is not a proper comparison at all because in the case of interest, the company gets a deduction and the person receiving the interest has to pay tax on it. In this case, the government is not getting two taxes. In the case of dividend, the dividend is post tax as the government has already got tax from the company. So it is not a proper basis for comparison. To tax this apportioned dividend again tantamounts to double taxation.

Dividend is an easy way out for companies to release funds, of which they have no use. This move will slow down declaration of dividend.

So some moves in the budget were user friendly while many changes were not user friendly.

EQM: How would you rate this budget as compared to other budgets?

Mr. Harish: I would say that the last year's budget was very good, because last year for the first time he went ahead and thought of the future. He planned for the future. He talked about corporatisation demergers and the Y2K problem. Therefore he was thinking of the future. In the past problems arise first, then they go into litigation then the government comes with a solution. Last year for the first time, the future was taken into consideration and provided for. In that sense, it was a very proactive budget.

The year before that budget he made lot of mistakes but he later corrected it that was very good. Among Yashwant Sinha's budgets, last year was the best, the year before that with the modifications was second and this year's is the third. Among other budgets Manmohan Singh's 1991 budget, ChidambaHarish's first budget and V.P. Singh's budget in 1985 were very good.

This year's budget is however, directionless.

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