Aam Aadmi will be only marginally happy   Jul 09, 2009

Mr. Kanu H. Doshi is a Commerce graduate from Bombay University and a fellow member of the Institute of Chartered Accountants of India. He is a Partner of Kanu Doshi Associates, Chartered Accountants, Mumbai. He is also the Dean – Finance, at Welingkar Institute of Management Development & Research, Mumbai where he teaches Corporate Tax Planning and Financial Management for the Master’s Degree in Business Management.

In an exclusive interview with Personalfn, Mr. Doshi offers his views on the budget.

Pfn: How would you rate the budget on a scale of 1 to 10 (10 being the highest)?

Mr. Doshi : I would rate it at 7.

Pfn: What are the major positives of this budget?

 Mr. Doshi :

1. The Finance Minister (Pranab Mukherjee) did not increase any tax rates for direct and indirect taxes. He could have easily justified the need to raise taxes owing to global meltdown and its impact on India and therefore the pressing need to mobilize our resources. But he did not do that. This will be the first plus point.

2. He has given relief though small by raising the basic exemption limits for three categories of tax payers. For senior citizens, the limit has been increased from Rs 225,000 to Rs 240,000. Similarly, for women assessees, it is increased to Rs 190,000 from Rs 180,000. For all other individual HUF assessees, the same stands increased to Rs 160,000 from Rs 150,000. Second Plus.

3. He has removed the surcharge of 10% on personal taxation, which is applicable if the income exceeds Rs 10 lakhs. Third Plus.

4. He has increased the wealth tax basic exemption limit from Rs 15 lakhs to Rs 30 lakhs, a 100% rise. Fourth Plus.

5. He has abolished Fringe Benefit Tax. Fifth Plus.

Pfn: What are the negatives of this budget? What do you think, it has not done?

Mr. Doshi :

1. Just like he has revised upwards the exemption limit for wealth tax and basic exemption limits for tax payers, he should have revised upwards amount for the deduction under Sec 80C for items like life insurance premium, PPF, EPF, ULIP, ELSS, NSC etc. Amount should have been revised upwards to atleast Rs 2 lakhs from Rs 1 lakh and the money saved by tax payers would have been invested in instruments which again would have flowed back to the government. Tax incentive would have given an impetus to capital market investments which in turn would have fueled urban demand and added to shareholder value. This would also have provided some support to crucial financial institutions which are withering in the financial crisis. This is a minus.

2. Another negative is that he has increased the rate of Minimum Alternative Tax (MAT) on zero tax companies from the present 10% to 15%. This will hurt growth oriented companies.

3. He has retained the surcharge on companies whose income exceeds Rs 1 crore. This is a third minus.

4. He has thrown open National Pension Scheme (NPS) to all persons. This scheme suffers from a major defect, namely this is the only scheme where EET operates. You will wonder what is EET? It is Exempt, Exempt, Taxation. So when you deposit in this NPS, no doubt you may enjoy your tax deduction. But, when you withdraw from that scheme, the withdrawal will suffer tax in your hands. He could have provided that it will not suffer any tax on withdrawal. On withdrawal, as you know at present EPF/PPF etc are not subject to any tax, then why single this out? In other words, nobody would participate in this scheme, knowing that if we pull out the money, it is going to be taxed. We have better investment avenues. Hence a big minus.

5. He says that the direct tax proposals are tax-neutral – meaning that the hike in MAT to 15% will be more than offset by what is lost in terms of reliefs in personal taxation, FBT being abolished, certain concessions etc. Which may not be so.

Pfn: The Finance Minister has promised to revamp the tax law, which is currently full of exemptions and complex provisions. Do you think this budget is a step in that direction?

Mr. Doshi : Though he is aware of this, he does not wish to do it in one stroke. I believe that the Direct Tax Code which was on the anvil for quite some time and which has not seen the light of the day till now, is proposed to be introduced within 45 days in the budget session and in the winter session, he wants to make it into a law. The Direct Tax Code, is likely to do away with lot of concessions, complications, and may lay a roadmap for even lowering of tax rates.

Pfn: Though the Finance Minister has removed FBT, surcharge and commodities transaction tax, he has not abolished the education cess? Is the continuation of education cess justified?

Mr. Doshi : Commodities Transaction Tax though announced was never activated or levied. Coming to continuation of education cess, I have always opposed these kinds of cesses, because it is the Government’s duty to make provision for education. There is no economic justification for “education cess”. Providing funds for education is as vital as defense of the country. If the FM can levy education cess to meet the cost of education, then why not defense cess for defense cost, health cess, food cess, and so on. Are the tax collections meant to pay for bureaucrats’ salaries? Till date nobody knows how much money has been spent on education from this cess.

Pfn: There was a representation from the members of mutual fund industry for the changing the tax status of equity oriented fund of funds (Equity FoF)? What in your opinion could be the possible reason for maintaining the status quo?

Mr. Doshi : I agree that the anomaly continues. AMFI represents the MF industry to the government (every year). I can understand a fund investing in debt schemes not enjoying any tax concessions. But If I invest in a pure 100% equity FoF schemes, even then I don’t get any concession. There is another anomaly for equity FoFs i.e. it pays Securities Transaction Tax (STT) several times. One, when the original fund buys equity from the market, it has to pay STT. Second, when the investor invested in such a fund exits, he has to pay STT. More harsh is the benefit available from Dividend Distribution Tax (DDT) for equity mutual funds is also not available to equity fund of funds. Hence, FoFs have not become a very attractive investment proposition.

Pfn: According to you, what is the one missing feature in the budget that you would have liked to see?

Mr. Doshi : I would have liked it if he had removed the 10% surcharge even on Corporates. Similarly, there was no need for the MAT to be increased by 50% to 15%. In your election manifesto you say you will disinvest to raise Rs. 25,000 cr and in your budget you take credit for Rs. 1,100 cr only? The capital market has reacted strongly to this. The capital markets are in a bad shape now and were banking entirely on the Fin Min to make it boom. He didn’t learn from his illustrious predecessor the art and technique of handling market sentiments. This was the biggest letdown of this Budget.

Pfn: How do you see this budget impacting the Aam Aadmi?

Mr. Doshi : Aam Aadmi will be only marginally happy. Finance Minister has kept some more money in his pocket.