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Budget: Expectations and implications

The economic policy direction is not going to change for many years to come, and some tinkering is all one can expect.

india Updated: Feb 26, 2003 00:15 IST

Budgets do not evoke the kind of interest these days as they used to do in the earlier years. When Manmohan Singh presented his earlier budgets, the whole country used to await them as they used to have an impact on the country's future.

Things are different now. The economic policy direction is not going to change for many years to come, and some tinkering is all one can expect. Even then, the budget's capacity to make an immediate difference to the taxpayer's wallet is undiminished. This year, the changes suggested by the Kelkar committee has made the normal prebudget rumour bazaar unusually active.

Let's take a look at the some of the rumours and see what they will mean for the investor.

** Abolition of tax on dividends: This will end double taxation on dividend income. This will make stocks more attractive. Before the imposition of the dividend tax in Budget 2002, dividend distribution tax was fixed at 10 per cent. The proposed move to impose a dividend distribution tax will make dividends tax free in the hands of investors. This will encourage companies to distribute dividend. For equity investors, stocks that yield high dividends, will once again become attractive. For the investors of mutual funds' monthly income plans, it shouldn't really make a difference. For debt fund investors, growth option will remain more tax efficient than dividend-paying ones.

Even those investors, who opt for the dividend route, will be better off compared to investors in fixed deposits. Investors in fixed deposits are allowed a deduction of up to Rs 9,000 under Section 80L of the IT Act, while for fund investors, any sum received as dividend will be tax free without any limit.

** Raising the exemption limit: The budget is likely raise the IT exemption limit from Rs 50,000 to Rs 75,000. The higher limit will provide some relief to those who are at the bottom of the tax ladder.

** Abolition of capital gains tax: The case for doing away with long-term capital gains tax is not very strong. If implemented, this will encourage investors to churn their portfolios more often. Those who have been holding stocks for over a year will find it attractive to sell. This could also promote investors to start taking a more long-term view. As short-term capital gains typically get taxed at the rate applicable to the highest slab of income tax, long-term investing will start looking even more attractive than it does now.

** Abolition of Section 80CCC and enhancement of the Section 88 rebate: Sec. 80CCC currently allows tax-payers to deduct Rs 10,000 from their taxable income while Sec. 88 allows a tax rebate of up to Rs 60,000. The merger will mean a significant relief to those who use Section 88 investments to plan their taxes. In the current arrangement, the Rs 10,000 allowed under 80CCC could have been invested in tax-saving equity mutual funds. Under the new dispensation, this now changes to Rs 20,000, but as part of the overall Sec. 88 exemption.

** Reduction of interest rates on RBI relief bonds: This is improbable because of the disproportionate impact it will have on senior citizens who rely on RBI bonds.

Of course, the budget is unlikely to accept a majority of the Kelkar panel proposals which advocate the rationalisation of the country's tax regime. The additional money accrued from the implementation of the politically unattractive revenue raising proposals is needed to finance the attractive ones like sops to taxpayers. For this reason, the happy scenario of giving with both hands and not taking away anything is not going to come true.

The author is director of Value Research

First Published: Feb 26, 2003 00:15 IST