Unimpressive tax proposals

Personal and corporate tax proposals in the 2018-19 budget unveiled on Thursday generated mixed reactions from industry experts as they believe not much has been done for the salaried class and the long term capital gains tax on equities will dampen investors’ sentiment. The reduced corporate tax for companies, however, got the thumbs-up as experts believe it will leave corporates with enough capital to grow.

Let’s start with personal taxes. While finance minister Arun Jaitley did not offer any changes in personal income tax slabs, he proposed a standard deduction of Rs 40,000 in lieu of transport and miscellaneous medical expenses. Nearly 2.5 crore salaried employees and pensioners will benefit from this decision.

Industry observers are, however, not impressed. Currently, deduction in lieu of medical and travel allowance stands at Rs 15,000 and Rs 19,000 annually, which means the benefit of non-taxable income is only Rs 6,000.

The finance minister, however, proposed several deductions for senior citizens. Fixed deposits and post office interest will be exempt up to Rs 50,000. He also raised the exemption limit for medical expenditure for certain critical illnesses from Rs 80,000 to Rs 1 lakh for very senior citizens (over 80 years of age).

“Looking at the expense and cost of healthcare in India, the ask probably could have been for much more. The government could have been more benevolent. It is still a welcome move as the government is directionally looking at higher sums,” says Promod Batra, partner, Deloitte India.

One of the surprise budget announcements was on taxing income from capital gains. Currently, long term capital gains (LTCG) arising from transfer of listed equity shares, units of equity-oriented funds, and units of business trusts are exempt from tax. The finance minister proposed a long term capital gains tax on gains exceeding Rs1 lakh at the rate of 10% without allowing the benefit of any indexation. However, all gains up to January 31, 2018 will be grandfathered. Grandfathered exempts a person from new regulatory change.

“A tax rate of 10% was not anticipated. People were expecting that a nominal 5% (rate of tax) may come in. This is definitely a big tax. It will also be a compliance burden, whether it’s for overseas investors or individual investors,” says Batra.

Priti Rathi Gupta, managing director and promoter at Anand Rathi Share & Stock Brokers, says the effects of the LTCG tax will be felt in the short term. “The capital markets will undergo some pain due to the LTCG being levied, but I see no major long-term effects as equities remain the most attractive asset class in the coming years too,” she says.

In a major boost to companies, the finance minister reduced the corporate tax rate to 25% from 30 % for companies with a turnover of up to Rs 250 crore in 2016-17.

"This is a mega boost to all startups, who have high valuation and sales. This will attract investors to startups and growth companies. Companies having a higher turnover will benefit from this,” says Pranav Jain, partner, MDP & Partners, a law firm.

The finance minister also proposed a tax relief for buyers and sellers of real estate by allowing a property to be valued at up to 5% below circle rates for calculation of stamp duties and capital tax gains.

Industry observers are not impressed, saying it’s too little to make an impact.

“The FM announced a 5% deviation from circle rates to remove hardship faced by the real estate industry. However, this may not be enough as the actual deviation of circle rates to prevailing market is in many cases as high as 30%, crippling transactions,” says Nidhi Seksaria, partner, real estate, BDO India.