Well-heeled? No honesty hug

Narayan Jain, TT, 1 February, 2017: Finance minister Arun Jaitley has decided to halve the tax rate at the lowest income slab of Rs 2.5 lakh to Rs 5 lakh to 5 per cent but skewered the relatively well-heeled folk by levying a 10 per cent surcharge on incomes between Rs 50 lakh and Rs 1 crore a year.

"The present burden of taxation is mainly on honest taxpayers and salaried employees who are showing their income correctly. Post-demonetisation, there is a legitimate expectation of this class of people to reduce their burden of taxation," Jaitley said in the budget speech.

Conversely, the levy of the surcharge on the higher income slab seems to indicate that the Modi government believes that the honest taxpayer only resides in the lower income slabs.

Let us not forget that the existing provision of a 15 per cent surcharge continues on taxpayers with a total income of over Rs 1 crore.

Taxpayers were expecting a higher exemption limit. But the government probably chose not to tinker with the tax slabs as that could shrink the tax base.

Around 2.5 lakh income tax payers stand to benefit from the proposal to halve the tax rate among 3.7 crore individuals who filed income tax returns in 2015-16.

As a result, a person having an income of Rs 5 lakh will be required to pay tax of Rs 12,875 only even if he or she does not avail any benefit under Section 80C or other sections. The tax incidence on the same income was Rs 20,600 in the corresponding year-ago period.

If the taxpayer takes the benefit of the Rs 150,000 deduction under Section 80C and Rs 25,000 as deduction for medical insurance and medical expenses under 80D, he or she could pay a tax of only Rs 3,863.

As always, the details lie in the fine print. The tax rebate under Section 87A of the Income Tax Act has been reduced from Rs 5,000 to Rs 2,500 and it will be available only to such taxpayers whose income is up to Rs 350,000. At present, taxpayers with an income of up to Rs 5 lakh can claim the rebate.

The relief to the salaried class is set to leave the exchequer poorer by Rs 15,500 crore.

Some operational changes aimed at improving the income tax structure were also announced. For example, the time for revising a tax return is set at 12 months from completion of the financial year, on a par with that for filing the return.

The time for completion of scrutiny assessments is being compressed from 21 months to 18 months for the assessment year 2018-19 and further to 12 months for the assessment year 2019-20 and thereafter.

Late fee

Taxpayers who are tardy in filing their returns will have to brace for a hefty fee. The government proposes to levy a fee of Rs 5,000 if the return is furnished after the due date but on or before December 31 of the assessment year. This means that even a single day's delay will attract the fee.

The fee will jump to Rs 10,000 in any other case, says the explanatory memorandum that clarifies the meaning of the new Section 234F of the Income Tax Act. There is a rider here: the fee will not exceed Rs 1,000 if the total income does not exceed Rs 5 lakh.

People in India tend not to file their tax returns - especially those who have an income of up to Rs 5 lakh. The fee will act as a goad to persuade more people to file their tax returns.

Capital gain

Another crucial benefit comes in the form of a shorter holding period for individuals who were looking to sell off their properties.

In case of transfer of immovable property, if the taxpayer holds the asset for three years, the gain is considered long term. The finance minister has proposed to reduce the period of holding to two years.

Further, the base year for cost inflation index has been amended from April 1, 1981, to April 1, 2001. It will help taxpayers to easily ascertain the market value of long-term assets and this measure will also help in reducing their tax burden.

Section 54EC of the Income Tax Act has also been amended to authorise the Centre to notify any other bonds in addition to National Highway Authority and Rural Electrification Ltd to ensure that a taxpayer could claim a long-term capital gains tax benefit of up to Rs 50 lakh by subscribing to these eligible bonds.

This budget lays emphasis on affordable housing. The projects meant for the lower income group will be treated as infrastructure project and such companies will be eligible to certain benefits. The period for completion of project has been extended from three years to five years.

A promoter who has unsold flats will not have to pay tax on notional rent for one year from the end of the financial year in which the completion certificate is obtained.

Limit on cash spend

Cash expenses in case of business or profession will not be allowed if they are above Rs 10,000 on a single day. The present limit of Rs 20,000 has been reduced with the object of encouraging digital payment or payments through cheque or RTGS and NEFT.

The amended rule will apply even if amount is paid for acquiring any capital asset. This is a step in the right direction.

The benefit for making a donation will now be available in case of a donation exceeding Rs 2,000 to any trust or political party if the amount is paid by cheque or through a bank or a digital process. Political parties are also required to accept donations exceeding Rs 2,000 by any mode other than cash. This is also a well-meaning measure.

♦ Narayan Jain is a tax consultant