Govt sticks to path of incremental reforms

Govt sticks to path of incremental reforms

Leading up to the budget, the worst fear of investors was that long term capital gains tax norms for equity and equity mutual fund investments would be tightened. 

Thankfully, that didn’t happen, and investment-related tax increases were kept limited to increased transaction tax on option premia in equity derivatives, and a 10% dividend tax on people, who get more than Rs 10 lakh as dividend. The former is of concern only to short-term traders, while the latter is very much in the super rich league.

Overall, Arun Jaitley’s third budget makes it clear that this government is going to stick to the path of incremental reforms. One of the things that I consider a must-do in every budget, but which wasn’t done in this one, was a hike in the exemption and tax slab limits, as well as the amount limits of the various tax exempt investments. For example, when the Section 80C limit remains at Rs 1.5 lakh, then adjusted for inflation, it effectively goes down. Moreover, this slippage is effectively worse for taxpayers in the lower slabs.

As far as savings and savings-related taxation goes, there’s a potentially huge change in this budget, one that has been in discussion for many years. The Finance Minister has brought the same taxation structure on all retirement savings products. This means that the National Pension System (NPS) is now, finally, at par with EPF as far as taxation at the time of retirement goes. 

However, he has done so not by making NPS withdrawals tax exempt (which was the demand) , but by making both partially taxable. Going forward, 40% of the withdrawals from each of these scheme will be taxable. The good thing is that the taxation of EPF is not retrospective.  With 40% of the corpus taxable at 30%, the effective tax rate will be 12% of the total. Of course, this will be reached only many years in the future. It would be good if there is some easy mechanism for EPF and NPS members to stagger their withdrawals so that they do not hit a higher tax bracket than necessary, but there is still time to work that out.

On taxation, the big, yet unfulfilled promise of this government is to make tax officials less ‘adversarial’. There are some promising moves this time, like making more of the interface digital rather than personal, but the success will depend on execution rather than intentions.
 What Jaitley needs to break is the pattern of squeezing the squeezable, rather than doing the hard work of chasing only the evaders. Will this change? I’m not yet sure.

(The author is CEO of Value Research