Off Season Tax Cuts

The finance minister said that the budget is not the only medium to announce concessions. Very few expected that he will choose off the parliament to announce wide tax cuts which bring joy to the public. Although the wider consequences are good there are hidden troubles. Especially EET (Exempt exempt tax) for the senior citizens who withdraw their pension fund sounds sad. The saving rate hiked from Rs.1 lakh to Rs.3 lakh sounds good but investment in mutual funds, post offices, fixed deposits and insurance are not allowed. Mr.F.M where can we invest this saving?

The Times of India writes (14 August 2009)


The promise of a modern direct tax code is that lower taxes and simpler rules ensure compliance and more revenue. Its provisions should avoid
complicated clauses, sub-clauses and caveats. Tax rates should factor in earning profiles. Also, successful tax rationalisation involves weeding out unnecessary exemptions and bad taxes. The draft of a radically new direct taxes code unveiled by the government scores in all these areas. And it should engender less litigation than the 1961 law, a jungle of rules expressed in inaccessible bureaucratese.

The tax authorities' definition of 'high income' has remained out of touch with India's post-reforms economic realities in terms of the middle class's changing face, transformed income levels and cost of living. Recognising this, the draft code substantially reduces individual and corporate income tax liability. But there's a case for a higher cut-off for tax application than the proposed Rs 1.6 lakh annual income. Reducing the corporate tax rate brings it in line with rates in many major economies. There will be heartburn over removal of exemptions, including home loan tax breaks. The draft code's larger premise, however, is unexceptionable. Not persisting with incentives for pre-selected economic activities, it seeks to put more money in people's hands to be spent or invested on the basis of choice rather than nudging.

Enhancing the tax deduction ceiling on savings is pocket-friendly. But feelgood may be offset by the exempt, exempt, tax (EET) regime extended to all approved social security investments. True, this addresses the anomaly of EET applying only to the New Pension Scheme. But it's debatable if withdrawals should be taxed, given the precariousness of our social security structures. Some investments as in provident fund are mandatory. So people would effectively be taxed on forced savings. If EET does kick in, all social security savings should be a matter of choice. Also, more thought needs to be given to ensuring the economic security of senior citizens.

The minimum alternate tax is to apply to assets, not book profits. This obligation is in line with international practices. But the 2 per cent tax rate seems excessive and could negatively impact loss-making companies and capital-intensive businesses. As for taxing foreign firms, should bilateral tax treaties be overturned, it can have a bearing on foreign capital. While foreign companies should be taxed like any other business, taxmen shouldn't appear to change rules agreed upon mutually. Overall, the draft code is welcome, more so when taken along with the goods and services tax (GST) that's to kick in by 2010. GST is work-in-progress and the new income tax code has a 2011 deadline. Should these dates be kept, India's direct and indirect tax system will soon be revolutionised. Here's hoping for a smooth road to implementation.