So, is this a dull budget, or is it an exciting one? Actually, it is both. This is an efficient budget that has a clear vision of what it has set out to do, but stayed within itself to what is achievable and what are the priorities. With three budgets out his maximum allotted six budgets in this government gone, Arun Jaitley has established his style of being a cautious and incremental reformer. The budget is very clear on what the problems are, what the solutions are, and in what order will they be implemented. For example, the FM has said often enough that corporate taxation has to be cleaned up. Over the last few months, he has indicated that exemptions have to be reduced and the tax rate decreased. Currently, larger companies are better able to exploit exemptions. The budget has removed many exemptions--which will mostly increase tax for larger companies--and made a small beginning in reducing taxation, first for smaller companies and startups.
However, the big news is on savings, personal investments and taxation. The budget does something here that has been talked about for more than a decade and was way overdue. It has brought the National Pension System (NPS) on par with Employees Provident Fund (EPF) as far as taxation goes. However, it has done so not by making NPS tax exempt at the time of withdrawal, but by making both partially taxable. Forty per cent of the withdrawals from each of these scheme will be taxable. Thankfully, the taxation of EPF is not retrospective. That is, tax will be due only on the corpus that grows from the contributions that are made from April 1 onwards. Previously accumulated amounts will not be taxed. I suppose is that there will be some protests against EPF taxation. This may be because even a fairly low-income EPF member will end up reaching the highest tax bracket in case of a bulk withdrawal. If 40 per cent of the corpus is taxed at 30 per cent then the effective tax rate is 12 per cent of the total. However, this level will also be reached only many years in the future. It would be better if none of these are taxed, but parity for NPS is not so bad either.
My big grouse with this budget is that the exemption and tax slab limits as well as section 80 tax exemption amounts have not been raised. These limits effectively become devalued with inflation every year. The government's tax inflow increases even if your income increases nominally, but your inflation-adjusted post-tax income decreases and the value of the tax-exempt savings decreases. What's worse, the effect is disproportionately worse for lower income taxpayers. However, Mr Jaitley has done well to remove the bias against small investors that was built into the dividend distribution tax. Even here, the general theme has been repeated--if there is a tax anomaly, he will remove it by taxing more in some places rather than less in other places. This will probably be the pattern for years to come.
In the investments space, the other change is a sharp increase in the transaction tax on option premia in equity derivatives and a 10 per cent dividend tax on people who get more than ₹10 lakh as dividend. Neither is of much concern to the typical saver. The transaction tax will hit only short-term traders, while those who get more than ₹10 lakh as dividend would be investors who have investments of many crores in stocks. The former is of concern only to short-term traders while the latter is very much in the super rich league.
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