Neutral: Lower income taxes, increased cess
An increase in education cess from 2% to 3% will take income taxes up, but the FM has provided an increase in slab levels by Rs. 10,000. So the tax exempt part of your income now is Rs. 110,000 for men, Rs. 145,000 for women and Rs. 195,000 for senior citizens. This is a saving of Rs. 1,000 in taxes (Rs. 2,000 for senior citizens).
Let me use the Finance minister’s examples. If you have an income of:
1) 110,000 to 150,000: Earlier tax was 5,100, now is 4,120 (save 980)
2) 150,000 to 250,000: Earlier tax was 25,500, now is 24,720 (save 780)
3) 250,000 to 500,000: Earlier tax was 102,000 now is 101970 (save 30)
4) 10,00,000: Earlier tax was 280,500, now is 282,117 (pay more 1617)
So it’s not such a big deal actually; just balances things out. But the cess increase will affect everything else in our lives, from toothpaste to motor cars.
Negative: Increased dividend distribution tax
DDT is now 15% (from 12%) and specifically for money market and liquid funds, 25%. The former will not be huge – if dividends were taxed in your hands, you would end up paying a lot more for them. Liquid and money market funds are higher, because they were giving dividends paying DDT, which was 12% but fixed deposit returns, which are just as secure, will be taxed at your marginal rate (usually 20%, more likely 30%) – the arbitrage was too much. Now @ 25%, this difference has been evened out. Even so, it takes away one big option for investing.
Dividends from companies is going to reduce a little bit with this additional tax. With typical dividend yields being 2-3% you will not probably notice the difference.
Positive: Exemption from Service Tax upto 8 lakhs per year.
If you are a small service provider you may have had to pay service tax on your income last year, if your income was above Rs. 400,000. Now that limit has been doubled, to Rs. 800,000. This is good for micro businesses and for consultants – consulting income needs service tax paid, but if the income is less than Rs. 800,000 a year you can avoid having to pay it.
Negative: Portfolio Management Services by individuals taxed
Some high networth inviduals would hire portfolio managers to manage their money. Such managers were uptil now exempt from service tax, and could pocket their fees in full. Now such services need service tax paid, which means a lower return for the investors.
Positive: No tax surcharge for companies less than 1 cr. in turnover.
If you own a small business and are profitable, you would pay 33.66% of your profits as tax. The new bill reduces that to 30.9%, if your turnover is less than a crore.
Negative: ESOPs have FBT
Employee Stock Options will now be considered a fringe benefit and taxed to the company on exercise. For the employee this means potentially 6% of the gains may have to be given back to the company to offset the fringe benefit tax paid. Regulation is not yet clear on this, but this is a sure negative for employees with ESOPs.
Negative: Art is now under capital gains
If you were an investor in art, till now you could have sold art and have the tax department consider it “personal assets” which did not attract tax. From 2007-08, you will pay capital gains tax on gains made. But art will have only long term capital gains beyond 3 years of holding, and if you are an art investor, 3 years is way too short to make any serious gains anyways, so this is barely a negative practically speaking.
