A Disappointing Budget with Hidden (Taxing) Gifts!
Gautam Nayak
Budget 2009 certainly disappointed the stock markets, which had unrealistic expectations. Given the constraints of finances, and the goodies already doled out in the last pre-election budget, the new Finance Minister had little left in the bag to hand out to taxpayers. This explains the minor tinkering with the exemption limits, raising the basic general exemption by Rs.10,000 to Rs.1,60,000 (a saving of all of Rs.1,000 in taxes !), and that for women and senior citizens to Rs.1,90,000 and Rs.2,40,000 respectively. He has however been more generous to high income earners, with those having taxable income above Rs.10 lakh saving 10% of their taxes (amounting to at least Rs.22,660) on account of abolition of the surcharge.
Abolition of fringe benefit tax (FBT) will benefit employers more than employees, as the procedural compliances would reduce. Most of the employee benefits provided by employers would now be taxable in the hands of employees, and at substantially higher rates. One would have to await the amended rules to see what benefits are finally taxed and at what value. Stock Options would certainly be taxed now in hands of employees, as there is no exemption as was available earlier prior to the introduction of FBT. The tax on stock options would be on the value of the benefit derived at the time of exercise of the option, and taxed at the time of exercise, resulting in a tax outflow even if the shares have not been sold. Contributions by employers to Superannuation Funds in excess of Rs.1 lakh would also be taxed as perquisites, though amounts received from Superannuation Funds as pension would also be taxable in hands of retired employee (resulting in double taxation). Employers would now need to rework employee salary and benefit packages to minimise tax costs, once the amended perquisite rules are notified.
Most budgets have at least one dangerous provision, rarely mentioned in the Finance Minster’s speech. This budget is no exception, with a deadly provision relating to taxation of gifts and deemed gifts likely to have serious implications for many. Till now, only gifts of money received from non-relatives were taxable as income of the recipient, if the total value of such gifts received in a year by a person exceeded Rs.50,000. The Budget seeks to tax even gifts received in kind, in the form of specified assets (viz. immovable property, shares and securities, jewellery, drawings, sculptures, paintings, archaeological collections and works of art), if the value of such gifts exceeds Rs.50,000.
The worst part of this amendment is that it seeks to incorporate the concept of a deemed gift. If any such immovable or movable property is purchased by a person at a price lower than its fair market value (based on stamp duty valuation or rules to be prescribed) by more than Rs.50,000, it is assumed that he has received a gift, which is taxed as a regular income.
The introduction of such a tax provision reveals the flawed mindset of the tax authorities, who believe that we live in a country where perfect markets exist, when such markets do not exist even in the USA. It is well known that the market prices of works of art often fluctuate to a great extent, from time to time and from market to market. A work of art bought in an open auction would generally cost more than one purchased from an art gallery, which in turn would cost more than a work of art purchased directly from the artist. Often, an immovable property or a work of art may be acquired for a distress price, as the seller needs the funds urgently. A flat in a building will rarely sell at the same price fetched by the adjacent flat in the same building. In such situations, to tax the purchaser on the basis of certain assumed valuation norms, just because he has got the work of art or property for a bargain price, is senseless.
One also needs to keep in mind that valuation of an asset is always subjective, and can never be an absolute figure. One person may value an asset at a figure higher than the value placed on it by another, depending on each person’s perception and need of the asset. This subjectivity would effectively provide room for discretionary valuation of the property by tax officers. Under such circumstances, it is likely that the value of almost every purchase of such types of properties will be challenged by tax officers, leading to unnecessary litigation.
How can a person be taxed on something which he has not really earned? Given the short run-up to the budget, it is possible that the Finance Minister may not have fully understood the far-reaching implications of this provision. This is one provision which he should certainly take a relook at, given the potential for its misuse.
Another misconceived provision is that relating to exemption for VRS compensation and relief under section 89. While an exemption up to Rs.5 lakh is available for VRS compensation, the taxable component of such compensation qualified for the spread-over relief under section 89. In a mistaken belief that employees are receiving a double benefit, employees are now being given a choice of selecting only any one of the two benefits for such VRS compensation.
The new presumptive scheme for small businesses having turnover or receipts of less than Rs.40 lakh seems attractive, but will be available only from the accounting year 2010-11. Further, small retailers would be worse off under this scheme, with their income being presumed at 8% of turnover as against the level of 5% of turnover under the current scheme. Obviously, the tax authorities believe their profitability has improved, notwithstanding the economic slowdown!
Employees and Investors now need to be more careful in ensuring that they have a Permanent Account Number (PAN), and ensure that it is recorded correctly by their employer and by the investee company/bank in all their investments. The tax deduction at source (TDS) provisions have been amended to provide that if PAN of the person to whom income is being paid is not available or is incorrect, instead of the appropriate rate of TDS, a higher rate of 20% would apply from 1st April, 2010!
On the investment taxation front, there are not many other changes. Zero coupon bonds issued by nationalised banks are also now being given the benefit of the discount on such bonds being taxed as capital gains at 10% (if long term assets), instead of being taxed as interest at normal tax rates.
Given this investment scenario, equities continue to be attractive investments from the tax perspective on account of the exemptions for dividends and long term capital gains on stock market sales. Zero coupon bonds offer a more tax efficient manner of investment in long term debt instruments, as compared to other interest bearing investments. Public Provident Fund continues to be an extremely attractive long term investment, with tax deduction for the investment and tax-free returns of 8%.
Finally, given the fact that the new direct taxes code is shortly on the anvil, one wonders whether there was any need at all for so many amendments to the tax laws, when the provisions of the direct taxes code will in any case override these changes. Perhaps, old habits die hard, and the Finance Minister cannot imagine a Budget without any direct tax amendments!
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