Every year the Budget is awaited with bated breath and this year was no exception. In fact, people were very apprehensive because the new government had just taken office.
P Chidambaram has always been remembered for his Dream Budget of 1997. But people were worried about the Common Minimum Programme and the influence of the Left.
If we analyse the Budget proposals, the fact is that the worst fears have not come true and many expectations have not been met either. In a nutshell it is a balanced Budget.
Chidambaram has manoeuvered carefully to meet the aspirations of a large section of society by hurting a small section who can afford it.
Let's look at how some proposals affect taxpayers, senior citizens and small investors.
New taxes -- fresh sources of collecting revenue
An education cess at 2 per cent has been levied on all kinds of taxes whether direct or indirect. This means that all taxpayers will now pay an additional 2 per cent of the tax amount irrespective of the tax slab or the type of tax.
That means this will be imposed on Income-Tax, service tax, custom duty, excise et al. The impact of cess on the pocket of taxpayers is shown in the table.
From the table it's obvious that the impact of the cess is minimal. The fact is that the entire education cess will be used for various 'pro-poor' education programs, including the provision of a 'nutritious pre-cooked mid day meal' for primary school children, so nobody should mind the pay out.
Turnover tax at 0.15 per cent will be collected from stock market investors as part of the new tax introduced as 'Securities Transaction Tax'. This new tax will only impact a limited section of society who buy/sell shares through recognised stock exchanges.
Those hit will be day traders, punters and arbitrage players who churn their portfolio frequently. Their thin margins will be hit by the tax on every transaction.
This cleverly conceived tax is expected to curb volatility by keeping speculators at bay and thereby increasing the confidence of long-term investors in equity. Nevertheless, this new tax is expected to bridge the gap between the government's revenues and expenditure in a small way.
It's noteworthy that the turnover tax will not be levied on investment in mutual fund schemes. That's one more reason why small investors should invest in mutual funds for their equity portfolio rather than investing directly in the stock market.
It should be noted that turnover tax has been introduced because (a) long term capital gain on sale of securities has been abolished and (b) short term capital gain tax rate has been reduced to 10 per cent only.
Service tax rates have been increased from 8 per cent to 10 per cent and also several new services have been brought in the tax net like outdoor caterers and TV programme producers etc.
As service tax is an indirect tax, it is usually passed on to the end consumer therefore everyone will have to pay when they avail of certain services. However, the impact will not be noticed much.
Income tax rates
It is unbelievable but true that individuals with taxable income upto Rs 100,000 annually will not have to pay any Income-Tax. However, there's no tax relief for individuals whose taxable income is above Rs 100,000.
Here, taxable income means after reducing standard deduction (in case of salaried individuals) but before subtracting Section 80 deductions like 80L, 80D, 80CCC(I) etc.
No major change in deductions or rebates
Section 88 provisions remain unchanged except for the addition of Section 88D for individuals with an annual taxable income upto Rs 100,000.
Similarly, provisions relating to deductions available under Section 80L, 80D, 80CCC (I) etc are unchanged. People had expected that the maximum deduction amount under Section 80CCC (I) (for contribution to pension schemes like Jeevan Suraksha etc. ) would be increased from Rs 10,000 to at least Rs 20,000.
Best post-Budget investment options
Senior citizens and individuals in zero or low tax brackets have something to cheer about. The interest rates of various popular small saving schemes like Post Office monthly income scheme (POMIS), NSC, KVP and PPF have not been changed or reduced from current 8 per cent.
So, people's worst fears have not come true! Senior citizens should eagerly await terms and conditions of newly announced '9 per cent Senior Citizens Savings Scheme'.
This scheme will replace the LIC's 'Varishtha Pension Bima Yojana' which also offers assured return of 9 per cent per annum payable monthly.
We hope that there is no cap or maximum investment limit for the new 9 per cent scheme for senior citizens and also that interest is paid at monthly intervals. What is the definition of 'Senior Citizen'? Fifty-five years, 60 years or 65 years? Lets keep our fingers crossed.
There is equally good news for high taxpayers also as 6.5 per cent Tax Free RBI Saving Bonds and 8 per cent Taxable Bonds continue without change. Also, dividends from open-ended equity funds continue to be tax free in the hands of investors.
Similarly dividend distribution tax in case of debt funds remains unchanged at 12.5 per cent. For young investors whose wealth creation strategy is based upon a long-term equity portfolio, they should open a systematic investment plan.
Due to volatility in interest rates (expected to continue for another six months) investors should choose floating rate bond funds instead of long-term income funds.
For savvy investors who understand the stock markets, investment in shares with proper research has become highly attractive due to much lower short-term capital gain tax rate of only 10 per cent. The icing on the cake is that the long-term capital gains on investment in shares has been totally abolished.
Conclusions
Two cheers for FM for his smart and bold moves! Why not three cheers? Let's save that for his next budget which is due in just eight months. So 8 out of 10 this time, and hopefully in February 2005 a Perfect 10.
The writer is CEO and director of Bajaj Capital.