For most people who depend on a monthly pay cheque for a living, the most significant thing in Budget 2008 is the tax relief announced by finance minister P. Chidambaram. While farmers will cheer the Budget because of the Rs60,000 crore loan waiver it provides them, those drawing salaries will likely be pleased at the prospect of paying less tax than they used to.
“Generous grants, compassion, righteous rule and succour to the downtrodden are the hallmarks of good governance,” Chidambaram said, quoting poet Tiruvalluvar while explaining the farm loan package.
Chidambaram’s move to provide some tax relief to individuals is backed by an 8% growth rate in the economy for 12 successive quarters till December, and higher tax collections. A more stringent tax monitoring mechanism and simpler filing policies have increased the number of taxpayers as well as tax receipts.
Tax (or tax relief) isn’t the only way the Budget touches the common man. Lowering of excise duties will reduce the prices of several products, including entry-level cars.
An increase in outlay for education and health by 20%, a national programme for the elderly, a national AIDS programme, increased allocation for scheduled castes and scheduled tribes, and programmes for women and children are some of the highlights of Budget 2008. The government has also announced three new social security programmes for the unorganized sector—the Aam Aadmi Bima Yojana, Rashtriya Swasthya Bima Yojana and the Indira Gandhi National Old Age Pension Scheme. The subsidy for housing for the poor has also been increased.
However, it is on the tax front that the common man has the most to celebrate. The income-tax exemption limits for individuals have been increased from the current Rs1.1 lakh to Rs1.5 lakh. For women, the basic tax exemption limit has been enhanced from Rs1.45 lakh to Rs1.8 lakh and senior citizens can now avail of the basic exemption limit at Rs2.25lakh instead of the current Rs1.65 lakh. Tax slabs have been increased such that for income up to Rs1.5 lakh, the tax liability will be zero, from Rs3 lakh to Rs5 lakh, the tax rate applicable is 10% and from Rs5 lakh onwards, the applicable tax rate is 30%.
Indrani Dutta (New Delhi)
The Budget speech brought a cheerful smile to the face of Indrani Dutta, mother of two. The announcement of the setting up of 16 new Central universities across the country has made her very happy as it augurs well for her tweens.
• Her family falls under the more than Rs5 lakh income bracket, and she says the increase in the basic income-tax exemption limit will make a good difference to her budget. Dutta is also delighted about the reduction in excise duties for tea/coffee machines, puffed rice and breakfast cereals.
She is also happy with the duty reduction on life-saving drugs from 10% to 5% and the inclusion of parents under section 80D for mediclaim deduction in tax computation.
• Separately, Dutta is planning to treat herself to some precious stones and other jewellery this year because the excise rates have been reduced from 10% to 5% in the new fiscal year.
• Even though cigarettes have been made more expensive for those who buy non-filtered cigarettes, Dutta is of the opinion that the rates should have been increased further to make cigarettes at least four to five times more costly.
• Dutta is unhappy that there was no review of the service tax on rent, which leads to double taxation of the tenant and the landlord.
• She is happy that the finance minister has listened to one of her wishes and announced the need to set up an agency to manage the price of commodities, especially wheat and rice.
• She said the finance minister should think equally about the welfare of the urban and rural poor. In her pre-Budget expectations, Dutta had advocated for a definite allocation of funds for building low-cost rooms and common toilets for the menial and migrant labour without whom, she said, the cities would not function. She does not agree with the way the Budget has concentrated only on the rural poor, without paying any particular attention to the urban poor.
The final analysis
• One half of India’s population consists of women, and the finance minister clearly has elevated their status by recognizing their very important role in the India growth story.
• Gender budgeting has been given more credibility and acceptance by including four more ministries in the existing 54 ministries taking this into account.
• There is an increased allocation to the ministry of women and child development.
• The women of India will benefit from increased allocation for women-specific programmes.
• Life Insurance Corp. of India has been asked to cover all women self-help groups, again a measure to empower the women.
• The exemption limit for women has increased from Rs1.45 lakh to Rs1.8 lakh for resident women.
• Maximum rate of 30% on income exceeding Rs5 lakh is also applicable.
• The finance minister could have done more in terms of subsidizing essential commodities or controlling their prices.
• Excise duty cuts on various commodities could lead to a reduction in the prices of these commodities, add a minor stimulus to consumption and would have an anti-inflationary impact.
• A major relief is the reduction in excise duty of all goods produced in the pharmaceutical sector; it will go towards promoting a healthy nation.
The increase in the threshold limit of exemption in the personal income tax category for senior citizens has been increased from Rs1.95 lakh to Rs2.25 lakh and Santhanam is happy with the development.
• As far as the introduction of the National Programme for the Elderly goes, Santhanam would like to know how the outlay of Rs400 crore will be utilized. Through this, will senior citizens be able to ask for reimbursement of medical expenses for the treatment of illnesses at private hospitals? he asked. The finance minister has allowed an additional deduction of Rs15,000 under section 80D to an individual who pays medical insurance premium for parents. Santhanam asked how many seniors could benefit from the initiative? And what happens to those who do not have children?
• Last year, because of the introduction of value-added tax (VAT), it was widely believed that the cost of pharmaceuticals would come down. However, there has been no change in drug costs. The new Budget has proposed to reduce the excise duty on all pharmaceuticals from 16% to 8%. It remains to be seen if the benefits will be passed on to the consumers or if we would see a repeat telecast of the VAT episode.
• Reverse Mortgage is a great move on the finance minister’s part. It will definitely help a sizeable number of senior citizens and many may want to take advantage of the programme. But only educated people would be aware of this proposal and not others, Santhanam said.
• There was hardly any mention in the Budget about health insurance for senior citizens, he added.
The final analysis
• The government has given senior citizens the respect they deserve for their contributions to the Indian economy. The requirements of a senior citizen for assured income, liquidity and social security and good health care facilities have been addressed by Budget 2008 to a large extent.
• The social security programmes announced for the unorganized sector would go a long way to help senior citizens.
• A major step is the national programme for the elderly, with a Plan outlay of Rs400 crore, which will be put in place in 2008-09. It is indeed heartening to note that the government proposes to establish two National Institutes of Ageing, eight regional centres and an old-age medical care facility in one medical college/tertiary level hospital in each state.
• The basic tax exemption limit has been enhanced from the current Rs1.65 lakh to Rs 2.25 lakh for senior citizens.
• The salaried employee may avail an additional deduction of Rs15,000 on medical insurance premium paid for parents. This would incentivize individuals to incur such premium payments for their parents.
• The senior citizens scheme and the post office plans have been included in the list of eligible investments for purposes of claiming benefit under section 80C.
• The reduction in excise duties on many products would certainly act as a driver for consumption by senior citizens, too, and thereby stimulate the economy.
•In Union Budget 2007, the government had announced a scheme for reverse mortgages on property owned by senior citizens in order to provide greater liquidity to them and to be a source of income in their sunset years. There was a lack of clarity on the tax and legal implications of such transactions. Budget 2008 has seen to it that reverse mortgage will not amount to transfer and the stream of revenue received by the senior citizen in this regard will not be income. This is an important initiative for senior citizens and would greatly enhance their self-esteem and confidence.
Dipesh Narang (Mumbai)
Dipesh Narang’s first reaction to the Budget was that it wouldn’t upset the balance of his monthly budget in terms of any higher indirect or direct taxes. Narang said Budget 2008 is a balanced one and meets a lot of his expectations.
• He said the Budget doesn’t provide a lot of sops to a salaried person, but doesn’t take away much either. He likes the increase in the income-tax threshold limit, which he said will help meet rising expenses on essential items, such as petrol and diesel. Narang said salaried people will end up receiving more post-tax income in hand (take-home pay). Had the Budget increased the savings limit under section 80C of the Income-tax Act, it would have encouraged the salaried person to save more without any increase in the post-tax income, he said.
• Narang said higher benefits under section 80C would also have provided relief to those who have taken out home loans. In a city such as Mumbai, any home loan borrower would easily exhaust the current limit under 80C. In addition, other incentives such as removing fixed deposits from the tax net would have benefited salaried people in a small way, he added.
• Narang is happy about other Budget announcements, such as the inclusion of mediclaim for parents and the inclusion of two more saving schemes under section 80C. It increases the savings basket for salaried people, he said. The increase in short-term capital gains doesn’t really affect Narang because he hasn’t invested much in stocks so far.
• Narang is sceptical about the fringe benefit tax (FBT) announcement. He would like to get more clarity on whether accommodation provided by the company is still under the purview of FBT or has been exempted.
The final analysis
•Increase in the exemption limit from Rs1.10 lakh to Rs1.5 lakh.
• Maximum rate of 30% is now applicable on income exceeding Rs 500,000 (as against Rs. 2.5 lakh earlier).
• This reduces the effective tax rate for the salaried class.
• The reduction in tax for an individual earning Rs500,000 of taxable income is to the tune of Rs45,320.
• The tax rate on short-term capital gains arising from the sale of equity shares or units of an equity-oriented fund on which securities transaction tax is paid has been increased from 10% to 15%.
• A five-year time deposit in an account under the Post Office Time Deposit Rules, 1981, and deposit in an account under the Senior Citizens Savings Scheme Rules, 2004, also qualify as eligible savings instruments for deduction under section 80C of the Income Tax Act, 1961 within the existing overall ceiling of Rs1 lakh.
• The salaried employee may avail an additional deduction of Rs15,000 (the limit is Rs20,000 for parents who are senior citizens) for payment of medical insurance premium for the parents.
Varun Giri (New Delhi)
By the time the Budget speech ended, Giri was a little apprehensive about the promises made by the finance minister. Although he is happy about the 20% increase in education and health allocation in the Budget, Giri has doubts about the quality and the benefits actually reaching the sections of society that need them the most.
• Giri said education was part of the primary focus of the Budget and the initiatives announced, such as the setting up of 16 Central universities and additional allocation to primary and secondary education. In addition, the planned Indian Institute of Technologies in Andhra Pradesh, Bihar and Rajasthan will increase educational opportunities, he added.
• He said he is happy with the reduction in excise duties of cars and scooters because this could mean an even less expensive Tata Nano, too.
Giri said the move to increase the cost of cigarettes was welcome because it would discourage youngsters from smoking.
• Giri said there is nothing much in the Budget that talks of job creation.
• More firm initiatives are needed to improve the environment.
• Giri is happy with the basic exemption limit increase from Rs1.10 lakh to Rs1.5 lakh. It would help the salaried class save on taxes and enable the family to save more, he added. He said the government had gone overboard with some planned initiatives.
• Even though the debt relief of Rs60,000 crore to farmers is a welcome move, this could potentially hurt the balance sheets of banks. A more pragmatic option would have been increasing the payment deadline or putting a part of the allocation in development of farm techniques and irrigation.
• An important development is the initiation of a model school programme.
The final analysis
• This programme proposes to set up 6,000 high-quality model schools in 2008-09. India seeking education as a basic necessity will greatly benefit from this announcement.
• Schemes such as Jawahar Navodaya Vidyalayas, Kasturba Gandhi Balika Vidyalaya, Nehru Yuva Kendra and Mid-day Meal Scheme have received additional allocations, all these aim to promote education for all.
• The student community will benefit from the finance minister’s announcement that three new Indian Institutes of Technology, two Indian Institutes of Science Education and Research, two schools of planning and architecture, and other institutes of higher education would be set up in the 11th Plan period.
• Careers in science and research and development have been encouraged.
• Students stand to gain from the overall increased outlay for building a knowledge society. Interconnectivity of knowledge institutions through a broadband network is a welcome step.
Virginia Brumby (New Delhi)
“I’m sure there are going to be some fireworks going off tonight in New Delhi because of reduction in taxes,” said Virginia Brumby on Friday.
Brumby said the reduction in income tax is the best part of the Budget. “I’m always a bit sceptical about the actual implementation of new government policies but if the tax rate does indeed go down, that means I’ll have extra money to take more trips within India,” said Brumby. In other words, Brumby will be giving her money to Indian businesses instead of the Indian government.
Even though the news on removal of double taxation of Fringe Benefit Tax (FBT) has excited Brumby, she takes it with a pinch of salt. She said she would be interested to see how change in FBT actually plays out. “If it means that I only have to deal with one unwieldy bureaucracy every March/April (instead of two), then it’s a step in the right direction,” she said. “Double taxation is an undue burden and, with an ever-increasing number of people working abroad, it’s a practice that will have to be re-evaluated and hopefully eliminated, not only for the good of the expatriates, but also for the health of the global economy”.
Brumby would like to see a new generation lead the political future of the country and focus on reform, honesty, progress, education, health and safety, especially on roads. India’s people are its greatest resource, and the government needs to do everything it can to protect them and to earn their trust, she said. “We expats have chosen to be here, but India’s best and brightest still need to be convinced to stay,” she added.
Expatriates can be taxed on worldwide income in India in the fiscal year following the year in which their stay in India exceeds 729 days (over seven years). Brumby said all the rules for expats are so complex that she had no idea about the 730-day rule. “I’m guessing that the way to get around that one involves a fat wad of rupees or the right contact. Unfortunately, I don’t have either of those, so I’ll probably have to wait out my 730 days,” said Brumby.
The final analysis
• The change in the personal income tax slabs also affects an expatriate.
• The exemption limit has increased from Rs1.10 lakh to Rs1.5 lakh and the maximum rate of 30% is applicable on incomes exceeding Rs5 lakh (against Rs 2.5 lakh earlier).
• The tax for an expatriate earning Rs20 lakh of taxable income reduces from Rs622,017 to Rs572,165.
• As per the provisions introduced in the last fiscal, the employer is liable to pay FBT on the allotment of shares to an employee. The law also permits the employer to recover FBT from the employee; however, this resulted in double taxation in the case of employees who are internationally mobile, in which case the employer paid FBT in India and the employee paid personal income tax in his or her home country.
• Relief has now been provided in the Budget, where the FBT recovered from the employee is considered as tax paid by the person, thereby enabling the person to claim credit in the home country if such income is taxed there.
(This Budget story, which is a follow-up on our Budget expectations story that ran on 12 February, is based on interviews conducted by Teena Jain in New Delhi, Rachna Monga in Mumbai and Vidhya Sivaramakrishnan in Chennai.)
(Analysis is provided by Ernst & Young Pvt. Ltd.)