Economic Survey

a) Indian Growth Rate was reduced to 6.7% in 2008-09 as against 9% in 07-08.

b) Agricultural growth rate was also reduced from 4.9% to 1.6%.

c) Deficit was increased from 2.7% to 6% resulting into price increase.

d) Effect of global recession still continues and revival may take six to nine months.

e) Delayed monsoon in India may adversely affect the economy of the Country.

f) Share of Direct tax increase to 56% of GDP in 2008-09

In this back ground having majority Government of UPA, there were many expectations from the Union Budget placed in Lok Sabha by the Finance Minister on 06.07.2009.

BUDGET PROPOSALS RELATING TO DIRECT TAXES & ITS EFFECT

I. Relief Granted

01) Tax Slabs

Basic exemption limit has been raised by Rs.10000/- in case of Individual, HUF, AOP and Rs.15000/- in case of Senior Citizen. Surcharge payable @10% by an Individual / HUF over income of Rs.10 lacs and in case of firm over Rs.One crore has been abolished.

02) Permissible Remuneration to partners of a firm – A.Y. 2010-11

At present:

- Upto Rs.50000/- or loss 100%

- Upto Rs.50000/- 90%

- Next Rs.75000/-60%

- Balance 40%

Amended

- Upto Rs.300000/- @ 90%of book profit & in case of loss upto Rs.150000/-

- On balance over Rs.300000/- @60%

Effect:

Higher deduction will now be permissible to partnership firms by way of remuneration to partners. It is advisable to amend the deed of partnership effective from 01/08/2009 so that higher remuneration can be claimed. If partnership deed is not amended suitably, above remuneration will not be permissible.

02) Disallowance u/s 40A(3) (cash payment exceeding Rs.20000/-) increased to

Rs.35000/- in case of payment of freight to the transporter w.e.f. 01.10.2009.

03) Deductions from total Income :

a) Deduction u/s 80E – interest on loan taken for higher education will now be deductible for any course of study after passing senior secondary examination or its equivalent from any school or Board.

b) Section 80-D : No change in deductions permissible towards Mediclaim Policy i.e. Rs.15000/- in case of Individual Rs.20000/- in case of HUF/Senior Citizen.

c) Deductions u/s 80DD – Expenditure on medical treatment of a disabled dependent increased from Rs.75000/- to Rs.1 lac.

04) Anonymous donations received by Trust will now be exempt equal to 5% of total income of the assessee or an amount of Rs.1 lac whichever is higher. Earlier such donation was taxable @ 30% without any basic exemption.

05) Weighted deducted u/s 35(2AB) will be available equal to 15% of the capital expenditure incurred on research and development to all manufacturers.

06) FBT payable by firm and Companies has been abolished from A.Y. 2010-11

07) WEALTH TAX :

Basic exemption limit from payment of Wealth tax increased from Rs.15 lacs to Rs.30 lacs. (At present open plot of land,  jewellery and ornaments and motor cars are covered under Wealth tax).

08) New Income tax Code will be placed in the Parliament with 45 days.

II. Provisions to generate higher revenue with more Hardships to Tax

Payers

01) Presumptive tax in case of Truck/Taxi plying

a) Heavy vehicle @ 3500/- per month increased to Rs.5000/- per month

b) Other than Heavy vehicle Rs.3150/- increased toRs.4500/- per month

Cont…..3

02) Presumptive tax on all business up to turnover of Rs.40 lacs (See 44AD)

Up to A.Y. 2009-10 – In case of retail business net income equal to @ 5% of turnover was compulsory & in case of Contractor net income @ 8% of contract receipts was required to be offered for tax.

From 01.04.2009 – All businesses i.e. contractors, wholesaler, retailer or manufacturer having turnover up to 40 lacs net profit after depreciation @ 8% of turnover will now be liable to tax.

Effect:

- In case of manufacturer or a wholesaler, net profit equal to 8% after depreciation is an impossibility & such dealers will have to maintain books and other records to get the accounts audited and furnish audit report even if turnover is less than Rs.40lacs.

- Proposed amendment is very harsh & it should be opposed at all levels.

03) Section 50C will be applicable for levy of capital gain tax on market value of the property as per guide-lines even if sale deed has not been executed and only Power of Attorney is given.

04) Section – 56 : Gift received in cash in excess of Rs. 50,000/- from a person other than relatives was taxable till date but now gift received in the form of immovable property (Land or building), shares, jewellery, drawings, paintings or any work of art is also covered and liable to tax from 01.10.2009. Even transactions of inadequate consideration will also be taxable in recipient’s hands as gift. Such inadequate consideration may be related to movable property also such as shares, jewellery, paintings etc.

Effect:

- In case a property is sold for Rs.15 lacs and the guidelines is Rs.18 lacs, difference of Rs.3 lacs will be treated as gift taxable u/s 56 in the hands of the buyer and same difference of Rs. 3 lacs will be taxed in the hands of the seller u/s 50(C) of the Act. Thus it will be taxed in the hands of transferee as well as transferor.

The proposal is to curb “Black money transaction” in the property market besides considering Mayavati’s case wherein it was claimed by her that properties and jewelleries were given by party workers as gift, out of love and affection.

Litigations between tax payers and tax department will increase on account of proposed change.

05) MAT on book profit has been increased from 10% to 15%. Any provision made in accounts for reduction in the value of asset, the same will be added to the book profit. MAT credit will be available for 10 years as against present limit of 7 years effective from A.Y. 2001-02.

06) No changes in the rates of Short term capital gain on shares (15%) or Long term capital gain on assets other than shares (20%).

07) In case of salaried persons – No Standard deduction as demanded and on the contrary they will now be liable for more tax on allowances, perquisites etc. for current year. Rules for as ascertaining value of perquisites will be framed shortly.

08) No change in the permissible limit of Rs.1 lac u/s 80C i.e. PF, LIP, NSC repayment of housing loan, education fee investment in M.F. etc. This should have been increased to boost savings.

09) Retrospective Amendments:-

a) Exemption u/s 80IA will not be allowed in case of execution of works contract

with retrospective effect i.e. from A.Y. 2000-01

b) Exemption u/s 80IB relating to housing project has also been restricted to

Developers and not the contractors. Such restriction has also been given with

retrospective effect i.e. from 2001-02.

c) Section 147 i.e. reassessment has been amended retrospectively from 1989-90.

Now all issues will be covered in reassessment even if the case was not reopened to assess such income.

d) Penalty for concealment u/s 271(1) (C) will be livable even on the income declared during search which related to the period for which return has already been filed or due date of filing return has already expired. This provision will be effective on search conducted after 01.06.2007.

III Conclusion

In substance, so called “Aam Admi Budget” does not appear to be for the benefit of a Public at large at least in relation to direct or indirect taxes because major relief have been given to tax payers falling in higher Income group only for example :-

a) Surcharge on income over Rs.10 lacs abolished. Direct saving over Rs.30000/- to higher class of persons

b) Surcharge on income over Rs.1.00 crore payable by firms abolished. Tax saving over Rs.3 lacs to such firm.

c) Wealth tax limit increased from Rs.15 lacs to Rs.30 lacs – Tax saving to higher class by Rs.15000/-

d) Custom duty on gold re-imposed whereas duty on branded jewellery abolished, resulting gold to be costlier and branded jewellery to be cheaper.

e) Excise duty on motor cars of 1200 CC and above reduced by 4% direct relief to higher class.

f) Commodity Transaction Tax (CTT) abolished. No relief to general Public. This will uncovering more speculation in commodities resulting into increase in prices for common man.

g) STT not removed and MAT increased from 10% to 15%. This adversely affected the share market & small investors lost heavily.

h) No incentive for savings which was expected from Rs.1 lac to Rs.1, 50,000/-

i) No efforts for brining black money in India lying in Swiss bank.

j) No incentives given for voluntary tax compliance.

k) Last but not the least, it has been announced that goods & Service tax will be imposed w.e.f. 01.04.2010 without proper deliberations and public acceptance at large.

The Finance Minister could have been transparent. He need not have ornamented this Budget at all. He could well have taken the Country into confidence about the economic mess, and asked all sections of the people to endure some hardship to help the nation to overcome the crisis. He did not lay down any solution to meet out deficit financing.

About the author

The above is guest article written by Mr. P.D. Nagar , he is a renowned Practicing Chartered Account since 1967 and proprietor of P.D.Nagar & Co.Chartered Accountants, Indore with over 35 years of experience.

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