Budget: Of taxes and what people want

The Budget for 2008-09 attributed the buoyancy in direct tax revenues to the stable and moderate tax regime coupled with a tax administration that showed no fear or favour.

This was carried forward in 2008-09 through changes in personal income tax slabs and rates conferring a minimum relief of Rs 4,120 and maximum relief of Rs 45,320 per annum per taxpayer. No change was made in corporate income tax.

The budget also raised short-term capital gains under Section 11A of the Income Tax Act to 15% to establish parity with dividends.

A commodities transaction tax with features on the lines of securities transaction tax on option and futures was introduced and the banking cash transaction tax was abolished.

Overall, the tax proposals on direct taxes were revenue neutral and a loss of Rs 5,900 crore (Rs 59 billion) was estimated on the indirect taxes side. The Budget for 2008-09 also effected a reduction in Central sales tax (CST) to 2% with effect from April 1, 2008 with a mechanism for compensation for losses to states.

The budget expressed satisfaction over the considerable progress made in preparing the road map for the goods and services tax, proposed to be operationalized with effect from 01 April 2010.

Gross tax revenue was initially budgeted to grow by 16.3% in 2008-09 over its level of Rs 593,147 crore (Rs 5,931.47 billion) in 2007-08.

In the event, the provisional actual for 2008-09 was Rs 609,705 crore (Rs 6,097.05 billion) which represents a modest growth of 2.8% over the level in 2007-08.

As a proportion of GDP, gross tax revenue fell from a level of 12.6% in 2007-08 to a level of 11.5% in 2008-09, which indicated a reversal of the robust increasing trend observed since 2003-04.

The robust growth observed in corporate income tax since 2003-04 could not be maintained in 2008-09 in view of the twin shocks; nevertheless a growth of 10.8% was achieved for the full year.

Similarly service tax also moderated and grew at 18.6% in 2008-09, which was otherwise creditable but represents a steep fall relative to the performance in previous years.

Personal income tax grew creditably at 20.8% broadly in line with its recent trend. Major impact was observed in traditional sources of indirect taxes, namely, central excise and customs, affected as they were by global shocks and the fiscal stimulus that entailed cuts in the rates of both the taxes.

Revenue from excise duties declined by 12.0% and customs by 4.1% in 2008-09. With non-tax revenues declining by 5.3%, overall revenue receipts increased only by 0.5% in 2008-09.

Adjusting for the accounting transactions of acquisition of SBI stake by the government from RBI, which entailed an equivalent transfer of profits of RBI, the growth in non-debt receipts was placed at 0.2%.

The economic survey for 2008-09, preceding the union budget 2009-10, was presented on 02 July 2009, which recommended the mix of tax cut and increase in expenditure, which is critical in the context of its impact on overall macroeconomic fundamentals like growth, interest rates and exchange rate.

The survey also suggested, review and phasing out of surcharges, cesses and transaction taxes (such as CTT, STT, FBT), incentivise states to do the same with respect to stamp duties.

Recommendations

Reduce the rate of corporate tax: The government should reduce the corporate taxation rate from 30% to 25%. Also, there should be some rationalization of taxes between domestic and foreign companies.    

Re-introduction of standard deduction: The government should re-introduce standard deduction for salaried employees so as to bring them in par with individuals doing proprietary business. Even though, the government has increased the basic exemption rate and introduced 80 C deductions. However, the facility of deduction u/s 80C may not be availed by all salaried employees.

Removal of Securities Transaction Tax (STT): The investors are recommending the removal of STT so as to further boost the securities trading.

Removal of Dividend Distribution Tax (DDT): The investors are recommending the removal of DDT so as to further more companies paying dividend.

Increase the amount of deduction of Interest on loan: The government should increase the deduction of interest on housing loan in case of self occupied property from Rs 1.5 lakh to Rs 3 lakh on the back of increase in realty prices which in terms would mean higher loans.

Increase the limit u/s 80C: The government should increase the limit of deduction u/s 80C from Rs 1 lakh (Rs 100,000) to Rs 2 lakh (Rs 200,000). Further, the purview of investment should be increased to include infrastructure funds.

Re-introduction of deduction u/s 80L: The Government should re-introduce the deduction u/s 80L regarding interest on bank accounts and deposits. Also, the deduction should be extended to company deposits as well.

Tax exemptions to Carbon Emission Rights (CER) credits under Clean Development Mechanism: Income derived from sale of CER should also be exempted with retrospective effect.

Increase in limit u/s 40A(3): The government should increase the limit u/s 40A (3) from Rs 20,000 to Rs 50,000. The limit was fixed years ago and needs upward revision.

Presumptive taxation of professional income: The Government should introduce presumptive taxation of professional income assuming a rate of 20-25% as the income chargeable to tax. The government could introduce a maximum limit of Rs 40 lakh (Rs 4 million) of gross receipts for this purpose.

Decrease the minimum limit for investment in bonds u/s 54EC: Currently, for availing exemption from Capital Gains from sale of long-term assets, the surplus received can be invested in bonds with the minimum limit being Rs 50 lakh (Rs 5 million). For this benefit to be availed by all investors, the minimum limit should be reduced.

Abolish MAT: Industry is recommending abolishing MAT or changing the formula for calculation of MAT.

MAT Provisions: Deduction available under sections 80-IA and 80-IB should be excluded from the ambit of MAT provisions and in this respect, earlier provisions as contained under section 1l5JA should be reverted back to.

Infrastructure projects covered by section 80lA and industrial units in backward area covered by section 80IB should not be indirectly subjected to tax by MAT provisions.

Reduction of rate of tax for FBT: The average rate of tax for FBT should be reduced from 30% to 20% as all employees may not fall in the 30% tax bracket.

Reduction in age of Senior Citizens: The government should reduce the age limit for availing the benefit of senior citizen from 65 years to 60 years in line with that of other organizations.

Extension of exemption under the STP Scheme (Section 10A/10B): Industry is recommending that the tax exemption for STPs continue for another 10 years (beyond 2009) so that companies can continue availing of benefits and have the time to adjust to the SEZ framework, which will take the next 2 or 3 years to really get operational.

This extension should be made concurrent with the tax holiday provided for exporting units in SEZ.

The scope of FBT be reduced  for specific Industries: The government should reduce the scope of FBT for specific industries mainly the service industry where human force is the main  driver of revenues.

Increase the scope of 80IA/IB provisions to more industries: The Pipe Industry is recommending to extend the benefit to intra-city and intra-state pipelines used for transporting natural gas from currently restricted to cross country pipelines.

To extend the benefit to all finding whether it be oil or gas from the current stand of only for oil findings.

Re-introduce Section 80 M: The industry has recommended re-introduction of Section 80M regarding deduction for dividends received from subsidiaries for calculating dividend distribution tax at parent level.

Re-introduction of Section 10(23)(G): To boost lending to Infrastructure sector, the government should re-introduce Section 10(23(G) regarding deduction interest earned on long-term lending to infrastructure projects to banks.

Outlook

The industry is seeking cut in direct taxes, which can act as a catalyst to economic growth.

The Economic Survey too seeks review and phasing out of surcharges, cesses and transaction taxes (such as CTT, STT, FBT), incentivise states to do the same with respect to stamp duties.

How Pranab Mukherjee balances the government's fisc and provides stimulus through tax cuts remains to be seen.