Buget formula: no big breaks, tinker with rates, tailor rules

Many elements of the Union Budget elicit different and opposing reactions from different people every year, but almost anyone you ask seems to agree on one thing invariably every budget: there was scope for the finance minister to give some tax concessions. Budget 2018 was no different, but the finance minister has done nothing of the sort, in order to be able to project fiscal deficit at 3.3% of GDP.

Yet, 44 significant changes have been proposed in Direct taxes in the budget, classified into seven buckets - widening and deepening the tax base, measures to promote equity, tax incentives, facilitate insolvency resolution, improve effectiveness of tax administration, rationalisation measures and miscellaneous others.  

The finance minister has developed a fondness for senior citizens - three of the four significant provisions under the measures for promoting equity are meant only for senior citizens. These include an increase in tax exemption limit for interest income from banks and post offices from Rs 10,000 to Rs 50,000, and an increase in the tax break on health insurance and medical expenditure under sections 80D and 80DDB - the hike in deduction limit for health insurance premium is up from Rs. 30,000 to Rs. 50,000; the increase in deduction limit for medical expenditure for certain critical illness from Rs. 60,000 (senior citizens) and Rs. 80,000 (very senior citizens) to Rs 1 lakh for all senior citizens. Pensioners would also be pleased with the newly introduced standard deduction of Rs 40,000 that they, too, would be eligible for.

In contrast, a salaried person who is not a senior citizen is going to be miffed with the proposals in the Budget. The standard deduction replaces the current deduction for medical bills of Rs 15,000 per annum and conveyance allowance of Rs 19,200 per annum. In effect, this translates into a miniscule increased deduction of Rs 483 per month. For decades now, the salaried class have gotten used to getting pittances in deductions, which do not even take into account the impact of inflation. They are bound to be even more disappointed given that now salaries of members of parliament will automatically increase every five years based on the inflation rate.

Pre-budget rumour mills had it right about the introduction of long-term capital gains in some form. The budget proposes to withdraw the exemption under clause 38 of section 10 and to introduce a new section 112A in the I-T Act to provide that capital gains arising from transfer of a long-term capital asset that is an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at 10% of such capital gains exceeding Rs 1 lakh. The long-term capital gains will be computed without giving effect to inflation indexation in respect of cost of acquisitions and cost of improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident.

The finance minister had earlier committed to reduce the rate of corporate tax in a phased manner. Being the last budget before general elections next year, the corporate sector in India was sure that there would be a reduction in the tax rates. There was, but with a twist - the benefit of the reduced corporate tax rate of 25% will only apply to companies that have reported a turnover of up to Rs 250 crore in financial year 2016-17. One of the themes projected in the budget was measures to promote equity-picking, and choosing a set of companies to roll out a tax break only adds to inequity.

Road cess

Considering the fact that the GST Council has already done all that was to be done under the GST, there were no major announcements regarding it in the budget. The narrative on the implementation of GST in the budget has a positive tone and states that most of the teething problems have been resolved.

The total GST revenue for 2018-19 has been estimated at Rs 7,43,900 crore - consisting of Rs 6,03,900 crore of CGST, Rs 50,000 crore of IGST and Rs 90,000 crore in GST Compensation Cess. Though these numbers appear reasonable, they seem to be on the lower side considering the fact that in December 2017 alone, net IGST collection was Rs 16,434 crore.

With nothing much to do on GST, the budget trained its guns on Customs and whatever is left of the Central Excise Act. Rates of basic customs duty were liberally increased for more than 50 items, changes were made to the Customs Act, a social welfare surcharge was levied on imported goods, apart from the latest from the cess stable of the government - a road and infrastructure cess (RIC). The RIC Cess is applicable to both goods imported into India as well as excisable goods produced in India. It looks like the RIC could turn out to be the saviour for the fiscal deficit for 2018-19, with a targeted revenue of Rs 1,13,000 crore.

Tax proposals in budgets of recent years have tended to follow a formula - do not give any substantial tax break; tinker with the rates and rules a bit; do not equitably extend tax largesse to everyone; and make amendments to ensure that adverse rulings in court against the tax departments are nullified. This formula is becoming as predictable as every finance minister concluding his budget speech with a quotable quote. And it seems set to continue, as there is no dearth of either tax rules to be tinkered with or quotes that can be sprinkled all over the budget speech.

(The writer is a Bengaluru-based tax expert)