BackTaxing the rich in a poor country
The big changes for your money are at the fringesboth at the lower and the upper ends
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The much anticipated inheritance tax gave the country a miss one more year. And neither did the dreaded capital gains tax raise its head. The big changes for your money are at the fringes— both at the lower and the upper ends. The very rich in a very poor country will pay for their affluence. People earning more than 1 crore will now see the surcharge on tax go up to 15% from 12% in the current financial year. For incomes over 1.1 crore, the marginal rate of tax is now 35.54%. The dreaded dividend distribution tax (DDT) sees a return. For an annual dividend income of 10 lakh or more, the investor will pay a DDT of 10%. This means that at an assumed dividend of 2-3%, an investor will need to have a portfolio of 3.5-4 crore, to begin paying this tax. This is in addition to the 15% tax already applicable. An additional cess on vehicles will cost more—1% on small petrol, LPG and CNG cars; 2.5% on diesel cars of certain capacity; and 4% on other higher engine capacity vehicles and SUVs. Get ready to pay tax at the point of purchase for luxury cars. Such cars costing more than 10 lakh will cost you 1% of the car value. Buying stuff in cash that costs more than 2 lakh? Pay 1% of your spend as tax at the point of sale. Worry if this cash was out of the tax net, for the government looks serious in identifying who you are.
At the other end of the spectrum there is a relief for the small tax payer. The rebate of 2,000 is now 5,000 for people who earn 5 lakh or less in a year. For professionals who do not get the benefit of an HRA deduction, the current deduction of 24,000 will now be 60,000 for those who live in rented houses. For small business, the threshold for presumptive tax is now doubled to 2 crore. For professionals who earn up to 50 lakh a year, their profit will be assumed to be 50%. Everybody will pay the additional cess of 0.5% on service tax. See your restaurant bills creep up a little bit more, as the service tax now stands at 15-14% tax, 0.5% Swachh Bharat cess and 0.5% Krishi Kalyan cess.
It is a smart move to use a nudge to get people into a mark-to-market National Pension System away from the old we’ll-announce-a-rate-every-year Employees’ Provident Fund (EPF). The budget has made 40% of your final retirement corpus at age 60 tax-free in NPS. To bring parity, only 40% of your EPF corpus (that accumulates from the next financial year) will be tax-free; you will pay tax on 60% at slab rate. For a person joining the workforce from the next year, the balance is tiling in favour of NPS away from EPF.
I will pick out three announcements that I think are big. One, a mandatory Aadhaar will help set an industry standard in basic KYC. Two, extending the efficiency released by moving to a depository system in the stock market, the government has announced the setting up of a Digital Depository for school leaving certificates, college degrees, academic awards and mark sheets. Three, the central bank will facilitate retail participation in government bonds. Imagine a world where payments banks, stock exchanges and banks are able to reach government bonds to households directly. The government gets household money, and households get a better deal than the 4% bank deposits rate or the 0.5% to 4% insurance return.
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