Cracking the Chi-doku

No, its not about another Japanese puzzle. Its about the Budget that the Finance Minister P. Chidambaram presented last week. But it still needs some cracking, and hence the title!

The annual budget making exercise is a big deal in India because it sets the tone in terms of policy and direction for the economy for the year ahead. The significance of the exercise is visible in the way the FM of the day presents the budget and the way the people follow it, with ritualistic zeal. Well, that's the macro picture. For most of the aam junta its just "how much taxes do I have to pay this year?" or "how much will the onions cost now?"

Here are some highlights of this budget from my perspective.

• Direct Taxes:

No change in the tax slabs, no change in the tax rates.

But the bone of contention for the salaried class as well as their employers was the Fringe Benefit Tax (FBT) that was introduced last year. This had created dissatisfaction across the board because of the debate and disagreements regarding what constitutes a fringe benefit. But the FM has done some good in this regard this year with which a large population will be happy; and that is to exempt contributions upto Rs. 1 lakh made by employers to the superannuation funds of their employees. Companies were very prompt in stopping the superannuation contributions last year and instead paying that amount as a monthly taxable component, thereby passing on the tax burden to the employees. But whether they will revert to the superannuation system now, is something we will have to wait and see, because there is no benefit for the companies in reverting to the old system now. But the FBT is here to stay and probably rightly so. Only it needs some more rationalization in terms of identifying fringe benefits and arriving at reasonable tax rates.

The much-publicized one-by-six scheme has been abolished and one wonders why. Probably the FM feels there are better ways available to track tax evaders. But what harm was this scheme doing? It must have been given a longer run. However this amendment, if passed, will be applicable for FY 05-06, so do not file your returns yet under this scheme, wait and watch, maybe you do not need to file your returns at all!

• Individual Investor:

There is a minor hike in the Securities Transaction Tax (STT) from .02% to .025%. But this will not affect you and me, unless you happen to be a day-trader.

Fixed Deposits kept with banks for atleast 5 years will now get tax breaks under sec. 80C. But there are so many instruments in the 80C umbrella of one lakh now, that its better to invest some time to decide on your tax saving investment vehicles.

Last year the FM had asked us to brace ourselves to pay taxes on maturity of assured return investment instruments like PPF, NSC, MIS, etc by announcing an intention to move towards the EET(Exempt-Exempt-Tax) regime, but no timeframe was set. And there was no mention of EET in this budget. However, it was later clarified that the policy to move towards EET still stands and a decision will be taken sometime this fiscal.

• Consumer:

Small cars are now cheaper. Soon after the FM proposed to cut the excise duty, the manufacturers announced lower prices and passed on the benefit.

A host of food items have been given excise duty cuts including poultry, oil, biscuits, aerated drinks, fish, packed foods, milk products, tea and coffee. But how much of savings will this translate into for the household budget of the common man remains to be seen.
Other household items which will see price cuts include DVD players, glassware, LPG stoves, clothes, cosmetics, toiletries, medicines and paper.

• Hardware and Software:
  

The 12% excise duty on computers has been reintroduced. This may see desktop and laptop prices move up by upto 5%. But the hardware sector is taking the duty in its stride as the FM has assured to provide funds to achieve the goal of making India a preferred destination for hardware manufacturing. The FM has also accepted some of the proposals of the Indian Semiconductor Association.

A new 8% duty on packaged software has been levied. Clearly, not only does this go against the efforts to promote the use of IT but also defies the logic that lower software prices will help curb piracy. The IT minister Dayanidhi Maran has already said that he will bring this up with the FM.

• Service Tax:
  

Services will now cost more, the tax rate is up from 10% to 12%. So brace yourself for a rise in your monthly utility bills. Also, more services have been brought under its ambit - CAs, BPOs, share transfers, registrars, ATMs, event sponsorships, PR services, internet telephony, outsourced credit card services, etc. As for the tax on ATM services and outsourced credit card services, it remains to be seen as to how much of this tax will be directly passed on to the customers. Interestingly, lawyers and doctors still remain outside the service tax net, one wonders whether its a coincidence that both the FM and his wife happen to be lawyers!

Clearly the FM is tuned in to the reality of the forthcoming polls and has annouced a budget keeping in mind the common man with many policies and programs geared towards the constituencies that worry about roti, kapda and makaan.