- No change in personal income tax; standard deduction of Rs 40,000 reintroduced, but medical and travel benefits to go
- Education and health cess increased from three to four per cent, which will affect all taxpayers and neutralise gains from standard deduction
- Long-term capital gains tax on gains above Rs 1 lakh reintroduced; markets react—both Sensex and Nifty fall; investment in markets likely to be affected
- Senior citizens to benefit from increase in tax exemption on interest income and on medical insurance, both up to Rs 50,000
- Corporate tax on MSMEs with turnover of up to Rs 250 crore (excluding proprietorships and partnerships) reduced from 30 per cent to 25 per cent
Union Budget 2018 has been on expected lines, aimed at appeasing farmers and others in rural areas, as well as small industry. When it comes to most tax proposals, though, it has disappointed everybody except senior citizens and Micro, Small & Medium Enterprises (MSMEs). In its last full budget before the next general elections, the BJP-led NDA government targets its votebanks in rural areas and the agriculture sector, promising them a lot. In direct taxes, however, where it was expected to bring in a lot of reforms and exemptions, it has done precious little.
Of all classes of taxpayers, the salaried employee has been left almost high and dry with finance minister Arun Jaitley announcing there would be no change in the personal income-tax rates. From a taxpayer’s perspective, there was a lot of expectation that the personal income-tax exemption limit would be raised. That has not happened. With GST becoming a reality, most citizens are being made to pay taxes on almost every purchase and, in most cases, the taxes are higher than before. That’s why there were expectations that the finance minister would put more money into the taxpayer’s hands by lowering personal taxes. To encourage higher compliance, simplification of direct tax laws was also expected. None of these has happened.
“This is a political budget,” says Daksha Baxi, partner at Khaitan & Co. “They really needed to reach out to those who suffered because of demonetisation and GST. They have been given a largesse. Apart from this, senior citizens, who suffered because of reduced interest, have got a lot. These are people who needed to feel that something is being done for them.”
It is clear that the salaried taxpayers are not the government’s priority, and so nothing much has been done for them. While there is no change in the personal income tax rates or slabs, the government has reintroduced the old standard deduction—a flat amount deducted from the salary income before calculation of taxable income. It was discontinued by former finance minister P. Chidambaram in Budget 2005-06. It’s back, in lieu of exemptions for medical and travel expenses—so no more bills to claim reimbursement.
“Raising the threshold limit for the salaried would have taken a chunk of taxpayers out of the net. The FM didn’t want that.”
Mukesh Butani, Tax expert and founder, BMR Legal
According to Budget 2018, there will be a standard deduction of Rs 40,000 for all salary earners who pay tax. However, the catchis—the existing benefits of medical allowance, where Rs 15,000 was tax-free, and transport allowance, of which Rs 19,200 was tax-free, have been removed. The net gain for salary earners is thus a little over Rs 5,000 only—and even that they may well not be able to get and instead end up paying more in taxes. That’s because the government has increased the education and health cess from three to four per cent, which is expected to neutralise all gains arising out of the standard deduction.
The prospects look up only for pensioners, who are set to benefit substantially as they did not get any standard deduction earlier, nor any of the other allowances given to salaried employees. They would be saving the tax payable on this entire amount of deduction.
Experts feel the government’s hands were tied as far as raising the threshold limit for taxes for salaried employees was concerned. “Increasing the threshold limit has been a challenge for the government and is against the goal of expanding the taxpayer base,” says tax expert Mukesh Butani, who is the founder of BMR Legal. “It would have immediately taken a chunk of taxpayers out of the tax net. That is something the finance minister did not want. Hence, it has not been touched.”
There is more bad news for salary earners and investors, especially those investing in the markets. Long-term capital gains, which had been exempted from taxes in 2004, will now be taxed at 10 per cent as the government has reintroduced the long-term capital gains tax on gains arising from the sale of listed equity shares exceeding Rs 1 lakh, with no indexation benefit. This will affect everyone who has invested heavily in market instruments that fetch returns in excess of Rs 1 lakh, and is expected to have a significant negative impact on the mutual fund industry, besides adversely affecting inflows from foreign investors.
“Introduction of long-term capital gains tax on equity gain exceeding Rs 1 lakh at 10 per cent without indexation will impact the equity market and the corpus that people need to create for meeting their financial and life goals,” says Sanjay Sanghvi, partner at Khaitan & Co. “There is another catch—this change is, in effect, a retrospective amendment since only capital gains made until January 31, 2018 will not attract this new tax. This is against the stated policy decision of NDA government not to make retrospective amendment in tax laws.”
As expected, the markets reacted negatively to this and the BSE benchmark Sensex closed 58.36 points lower than yesterday’s close at 35,906.66, after losing about 400 points in intraday rallies. The NSE Nifty also closed 10.80 points lower than its previous close at 11,016.90.
“There is a similarity between the tax proposals in this year’s budget and what was there in last year’s,” says Gokul Chaudhary, partner at Deloitte India. “Last year, tax for people at the lower end of income was brought down from 10 per cent to 5 per cent. This year, too, there is a Robin Hood approach of reducing tax burden at the lower end of the pyramid, but increasing it at the upper end. People at the lower end will get the benefit of standard deduction, while those with higher income will be taxed for long-term capital gains.”
It is towards senior citizens that the budget has been very kind. The finance minister has proposed to increase the limit of deduction under section 80D for senior citizens for medical insurance from Rs 30,000 to Rs 50,000. Exemption on interest income has also been increased from Rs 10,000 to Rs 50,000. These measures have been brought in because senior citizens had suffered due to reduction in interest on deposits.
Keeping his word of bringing down corporate tax in a phased manner, the finance minister has brought it down for MSMEs. According to Budget 2018, the threshold limit for MSMEs—for which tax has been brought down from 30 to 25 per cent—has been raised from a turnover of Rs 50 crore to Rs 250 crore. This is also because the government looks up to this sector for employment generation.
Explaining the reason why the government did not raise the threshold limit for the entire corporate sector, experts point out that the 2015 announcement of phased reduction in corporate tax was predicated on a reduction in exemptions, which have not happened. Chaudhary, however, feels that given the higher cess and surcharge, even after bringing down the tax for MSMEs from 30 per cent to 25 per cent, the effective tax rate would be 29-34 per cent.
From an indirect tax standpoint, as expected, the focus has been on customs duty. There is a clear change in policy to increase customs duty to encourage domestic manufacturing. Accordingly, customs duties on products like mobile phones, television sets and furniture have been increased by 10-20 per cent. “The FM wants to promote Make in India by taking a protectionist approach,” says Butani. “There had been no upward rejigging of customs duty in the recent past, which has been done now.”
Suresh Nandlal Rohira, partner at Grant Thornton India LLP, says, “With the powers being disseminated to the GST council, there were no significant expectations on the indirect tax front, although a broad-level roadmap on bringing the petroleum sector under GST could have brought some relief to the surging prices in that sector.”
Overall, besides addressing the rural and agrarian sectors, the finance minister has given little to most people, barring some sections. But considering that he has pegged fiscal deficit for 2018-19 at a low 3.3 per cent, there was little he could give out.