Prima facie Budget 2016 does not have much to speak of. It was business as usual and the government did its bit of supporting its socialist agenda. There are a few really good things here and there and a lot of things that were necessary to have in the space of rural and social development. Thus any effort in that area by any government who takes the mantle to improve the lives and livelihood of rural India is always welcome and good to have.
The Overview:
On the one hand India is growing at about 7% plus, despite very unfavourable global conditions and two consecutive years of shortfall in monsoon, which is very nice by all standards. It has the highest ever level of about USD 350 billion in forex reserves amidst global slowdown and turbulence. India is being considered as a ‘bright spot’ amidst a slowing global economy by International Monetary Fund. On the other hand we do not seem to have enough money. Neither do we seem to have ways and means to generate money i.e. revenue. Thus the Government is trying to garner money from everywhere possible, for example voluntary disclosure of income scheme (VDIS) with tax @ 45%, levies, increasing the indirect tax base, CESS and charges across the board, listing of PSU GIC companies, newer methods of dispute resolution, changes in advance tax collection, reduction and elimination of subsidies, surcharge on richer people etc. Further we have excess burden due to 7th pay commission recommendations and implementation of one rank one pension (OROP) for our defence forces. We also have to fund social and mass initiatives, such as gas connection to as many as possible, doubling of income for farmers, digital push especially in the hinterland, e documentation & storage, electricity for all, statutory recognition to Aadhaar & health protection to underprivileged sections and similar.
In the light of the above following is a general analysis of the budget based on various areas of interest to us. Please note that our analysis is divided into two sections viz., Part A – Financial advantages and Part B – Financial disadvantages. Please also note that our comments and views are highlighted in bold.
Part A – Financial Benefits and Advantages
- The tax rebate under section 87A has been raised from Rs. 2,000 to Rs. 5,000 for individuals having income below Rs. 5 lakhs. So if someone earns below Rs. 5 lacs, then the person would save Rs. 5000 from the total tax payable.
- Increase in interest deduction from Rs. 2 lacs to Rs. 2.5 lacs, for first time home buyers provided loan is less than 35 lacs & home value is below 50 lacs. This is a good incentive considering that a higher amount of interest will be deducted from income and thus a tax saving of Rs. 15,000 if you are in 30% tax bracket.
- Increase the limit of deduction of rent paid under section 80GG from Rs. 24,000 p.a. to Rs. 60,000 p.a., to provide relief to those who live in rented houses. This is for persons who do not own a home and who do not get HRA benefit. This is more of a social initiative then a financial benefit. Hardly creates any impact.
- No dividend distribution tax on REIT investments. This is yet to become a popular area of investment however this amendment was logical so good idea as a matter of rationalisation.
- Amendments in the SARFAESI Act 2002 to permit non institutional investors to invest in Securitization Receipts. This seems really interesting and we are awaiting further clarity on this subject.
- For acquisition or construction of a self-occupied house property,deduction of interest payable on capital borrowed will be allowed if such acquisition or construction is completed within 5 years from the end of financial year in which capital was borrowed. This was 3 years earlier and now extended to 5 years.
- For computing capital gains on immovable property the date of agreement is to be considered as the date of purchase and not the date of registration. There was some confusion earlier and now this is cleared.
- Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of National Pension Scheme (NPS). This makes NPS a very attractive product now. For the salaried against the choice of an EPF, the NPS becomes a way better product.
- For the self-employed the benefit available under section 80CCD (1) should be emphatically taken by investing into NPS. However note the following and do not rush into this blindly.
- Invest in NPS only if you do not mind having a certain equity exposure, i.e. asset class option E of NPS
- It will be disastrous if you are going to opt for NPS just for the tax benefit and take a conservative approach.
- If you are a 100% equity investor then you are far better off without the tax benefit of NPS.
- Domestic taxpayers can declare undisclosed income or such income represented in the form of any asset by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income. Declarants will have immunity from prosecution. So if you hold physical cash (black money) you have an opportunity to convert by paying 45% tax.
- Increase the turnover limit under Presumptive taxation scheme under section 44AD of the Income Tax Act to Rs. 2 crores to bring big relief to a large number of assessees in the MSME category. Very progressive move.
- Extend the presumptive taxation scheme with profit deemed to be 50%, to professionals with gross receipts up to Rs. 50 lakh. Threshold limit of audit u/s 44AB raised from 25 to 50 lacs. Very progressive move.
- Model shop & establishment bill – Establishments have to follow norms for staff and holidays. Now establishments can be open all days.
- Redemption of Sovereign Gold Bond Scheme, 2015 not chargeable to capital gain tax and transfer shall be eligible for indexation benefits.
- Interest earned on Deposit Certificates issued under Gold Monetisation Scheme, 2015 and capital gains arising from them shall be exempt from tax. This is good if you are holding idle gold – just liquidate it and earn interest plus enjoy appreciation in the value of gold.
- Period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years. This is a business booster and a great step considering ESOPs and listing gains.
- Increase in free baggage allowance for international passengers. Tiny benefit here.
Part B – Financial Disadvantages / Losses / Expenses / Withdrawal of benefits.
- Practically everyone earing money will need to file tax returns. Previously if you had tax free income or exempt income and taxable income was lesser then the lowest tax slab filing of returns was not mandatory. Now this is made mandatory.
- If you are earning salary and contributing to EPF, 60% of the corpus generated from contributions after 1st April 2016 will be taxed at the time of withdrawal. This is per se bad news but there is greater good news in the form of NPS. It is time to move away from EPF and open an NPS account and create far more than you could possibly imagine by being in EPF. This is a negative per se but there is larger benefit in the form of NPS. Read points 1 (h) & 1 (i) above. A clarification was also issued saying that if you used the 60% of balance corpus to purchase an annuity then in that case tax would not be levied.
- Surcharge to be raised from 12% to 15% on persons, other than companies, firms and cooperative societies having income above Rs. 1 crore. Huge adverse impact on the wealthy and who report income in excess of Rs. 1 crore per annum. Tax rate is now 34.5% for this category of persons.
- Indirect tax in more goods and services has been increased on an overall basis which means gains of about Rs. 20,000 crores for the exchequer. But this makes life a little more expensive for all of us.
- Service tax is now 15% with introduction of Krishi Kalyan Cess of 0.5%. Indirect tax is already hurting and further increase will trigger cash transactions.
- Additional tax at the rate of 10% of gross amount of dividend will be payable by the recipients receiving dividend in excess of Rs. 10 lakhs per annum. So if you hold equity shares above Rs. 5 crores in value, whether listed or unlisted or private holding it is likely that you will have to pay additional 10% tax on such dividends.
- Tax to be deducted at source at the rate of 1 % on purchase of luxury cars exceeding value of Rs. 10 lakhs and purchase of goods and services in cash exceeding Rs. 2 lakhs. This is an excellent step. This will ensure that people have enough proof and a strong balance sheet to support the purchase of luxury car. If you use too much cash or deal in too much cash be careful especially while you are spending or buying a luxury car. They are waiting to catch you!
- Securities Transaction tax in case of ‘Options’ is proposed to be increased from .017% to .05%. Arbitrage funds will suffer but not of much material impact in the larger scheme of things. Also this impacts you if you are a short term trader.
- Penalty rates to be 50% of tax in case of underreporting of income and 200% of tax where there is misreporting of facts. Salaried income earners need to worry more in this space as they are most careless in filing income tax returns. Self-employed and business owners also need to be wary
- Disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed under rule 8D of Section 14A of Income Tax Act. This is quite a ridiculous rule and we hope it is abolished sometime.
- Data mining can result in opening of cases. Everyone needs to worry especially if there is something not in line with compliance required. Time limit is not specified which may be a concern from tax payers point of view.