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Budget 2001-02: How will taxes change?

Direct Taxes

Direct tax collections have shown promising trends so far in this fiscal year. Total collections on this front are up by 27.7% during Apr-Jan 01 against the budgeted 26.5% for the fiscal year. Income tax collections rose by an impressive 35.4% against the budgeted target of 18.4%. This vindicates the broad thrust of the policy of lowering tax rates and increasing compliance by assesses.

• In light of the recent earthquake in Gujarat, the 10% surcharge on Income Tax, which was supposed to be temporary in nature, is likely to be continued. However, the additional surcharge of 2% levied after the earthquake is likely to be removed.

• As a measure to revive the sagging market, the Budget is likely to witness a reduction in the dividend tax to 10% from the existing 20%. Alternatively, the finance minister may accede to the demand of industry to move the incidence of taxation of dividends from companies to recipients' doorsteps, but without any reduction in rate. FIIs investment limit in domestic companies may also be hiked to 49%.

• MAT (Minimum Alternate Tax) is likely to be raised to 10% to discourage wide gaps between book profits and taxable profits. The finance minister may decided to provide a shot-in-the arm to software companies which are having to contend with slowdown in US economy by keeping in abeyance the 20% phased reduction of tax exemption on export profits for the next fiscal year. This would enable software companies to retain key overseas accounts through re-negotiations that appear inevitable in the in the coming fiscal year.

• The basic exemption limit is likely to be increased to Rs 60,000 from the current Rs 50,000. It may be noticed that the basic exemption limit has remained unchanged for last three years.

• Housing sector is expected to receive another round of tax sops, especially in light of the recent earthquake in Gujarat. The tax rebate on housing loans under section 88 of income tax act is likely to be increased to Rs 30,000 from the existing Rs 20,000. Also, interest on loan for a self-occupied property is likely to be exempt from tax up to Rs 125,000 from the current Rs 100,000.

• Widening of tax base by extending the one-on-six scheme to new cities/towns is also expected in the budget.

• There have been talks of taxing withdrawals from the Provident Funds on the lines of National Savings Scheme. However, considering its political repercussions, such a move is unlikely to materialise.

• Indirect tax collections grew by a mere 7.6% in the first ten months of this fiscal year against the budgeted 14.5% for the entire year. Total tax collection as a result grew by only 13.5% during Apr-Jan 01 against the budgeted growth of 17.8% for the entire year.

• The finance minister is expected to bring a plethora of new services including doctors and lawyers within the ambit of service tax. The service tax rate may also be increased to 8% from the present 5% in order to bring it on par with the minimum slab rate of excise duty.

• Despite the subdued trend in indirect tax collections this fiscal year, the budget is unlikely to impose any significant hike in excise duties, though there are chances of further rationalisation on this front.

• High import tariffs may be imposed on some sensitive items after the removal of Quantitative Restrictions (QRs) on the remaing 715 items from 01/04/01. The items may include second-hand cars, liquor, wheat, edible oil, TV sets etc. These tariffs will, of course, be within the bounds of the rates negotiated with the Word Trade Organisation.

Overall, D&B believes that the current year budget initiatives would be more on the lines of inducing and enforcing compliance rather than attempting to usher in major structural changes or amendments.

Rediff-Dun & Bradstreet Budget Impact Analysis

Budget 2001

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