Direct Tax Code - Review by a tax payer!

Some Highlights of Draft of new Tax Code proposed in July-August 2009 and what I feel would be better:

Maintains tax exemption at Rs 1.60 lakh income a year: I personally feel that there should be no zero tax limit. Everyone MUST pay tax, however little it be, say 3-5%. If somehow, tax collection cost can be curtailed, then this segment should end up contributing maximum to the coffers of the Taxmen. Imagine, there could easily be 5 Crore people earning an average of around 1 lakh per year. If somehow, tax can be collected from these people (say at a rate of 4% i.e. 4,000 per person) then we end up collecting 20,000 Crore per year.

10% tax on income of Rs 1.6-10 lakh: This is the range within which maximum people change their lifestyle, get financial freedom between the two ends of the spectrum, sensitivity towards paying tax changes altogether -and therefore slab change of tax should appear somewhere here in between, say at around 4-5 lakhs -from a rate of 4$ to around 12-15%, maybe creating two slabs herein.

20% on income over Rs 10 lakh up to Rs 25 lakh: What is the point of imposing a higher slab rate at Rs 25 lakhs in India in current scenario. Most people around this range become comfortable paying tax at any rate -provided it is reasonable (and I personally find a 30% tax rate to be excruciating that too when one is charged with toll taxes, service taxes and sales taxes on almost everything he buys. So typically one ends up paying 30% plus another 10% tax on his income for every rupee spent. So, I suggest hitting the highest tax slab in the middle of this range and that should not be more than 20-25% as one is anyway going to pay tax at every consumption point -especially with GST kicking-in sometime soon.

30% on income beyond Rs 25 lakh : Maybe idea behind bringing in a higher rate was to bring in a long-term vision. But this could be done by linking the tax slabs to a CPI or WPI with rounding-off rules. Ths itself should shave-off a couple of Crores from expenditure which the MoF (or perhaps some other Ministry) would spend on an average on each Budget item.

All direct taxes including FBT and income tax would be brought under one code: Am foxed on this one as I don't understand legality of the same. FBT is already out and perks tax is back. I was all for FBT as it legalised individual tax saving by providing a lower tax rate on an individual's exemption which'd now be taxed (any allowances not being under tax net should soon come under it

Corporate Tax rate to be 25% against 30 per cent: WHY? I mean why a lower tax rate for Corporate and not for individuals. And Corporate are anyway eligible for all expenditures unlike an individual who doesn't even get more than Rs. 800 for conveyance and 1250 for medical with almost nothing for food (unless its Sodexho etc which you don't use for your daily meals usually). And also, when it is amply clear that small businessmen would never want to pay such a high tax rate then why not create slabs here too like zero or upto 5% tax rate (I am never for zero though) for businesses with turover upto 1-5 Crores, a higher rate for businesses with turnover upto 25-50 crore and so on (Laffer was not laughing when he proposed intermediate rates efect on compliance). I am sure, small busineesmen would love to pay tax and get away with Democle's sword hanging upon them all the time.

Wealth Tax to be levied on wealth over Rs 50 crore: Again, a very futuristic feature. At 1 Crore, people don't mind taxes (rhetoric: provided they are reasonable)

Abolition of Securities Transaction Tax: So that the Rich don't become poor? or to make a rickshaw-wala spend his day at some stock exchange instead of going to earn. A totally lobbied move. I am a big time punter yet would never say yes to abolition of tax on securities trading. Because this is done by typically rich people -who have time and energy or resources to devote more resources intot rading. A low rate would surely promote volumes and increase tax too but why "Zero". Talk about multiples of a low fee income per transaction and watch it grow.

Re-introduction of long-term capital gains tax: The only thing which provides stability to a nation's income is long-term investments -be it into real estate or insurance or PPF. Once again, totally out of sync. Abolishing tax on security trading and introducing tax on long-term investments. Promote speculation and ruin investment habit. Follow the west and doom before you bloom. Wouldn't say more on this.

Raising of tax deduction on savings to Rs 3 lakh: Somehow, something sagacious here. Need of the hour is medium to long-term savings. Average Indian is still poor by international standards and therefore needs to dip into his savings every once in a while be it for a marriage, education, big investment (say a car or a house etc) and a tax break on 3-5 year horizon investment product provides him incentive to save and add to GOOD consumption in economy. An EEE regime would add strength to it. If you can remove tax on securities trading then why not continue with EEE regime (i.e. tax Exempt at the time of investing, earning/accumulation and withdrawal stage hence 3 times E).

Would love to discuss more...maybe I will.

Where is the bailout package for employees?

Governments have rushed into saving complacent and greedy Investment Banks and Housing Giants who were trying to make merry on wide spreads on sub-prime credits. However, nowhere have we seen measures being taken to save employees being sacked from these as well as other directly or indirectly affected organisations. Targets are usually the newest employees on board who had little role to play in these strategic decisions led failures. Is it not the job of the government to protect these employees by ways of passing extraordinary legislation whereby these organizations can be made to pay dearly before sacking them?

The same shall not happen even when many of these employees will end up taking their own lives out of inability to cope with depression/other situations leave apart the kind of trauma many will go through by working in jobs well below their qualifications while it shall be ensured with clockwork precision that no organisation goes bust on account of sub-prime crisis.

Hail the wisdom of the world including the most sought after Economists/CEOs who can not keep their organisation free from whirlwinds such as sub-prime but will heartlessly push people off the board in an endeavour to show action to investors and within a year will be hiring at campuses again with broad grins, fat pay-checks out of written-back provisions/losses and puffing their wallets with newly minted currency JUST FOR THEM alone.

Make Severance Pay Tax free!

We are already seeing lay-offs in India which is quite a new phenomenon for India Shining and there shall be many more in next months if economic downturn or the US recession continues to plague us. All these lay-offs come with severance money to employees facing lay-off, which range from 15 days to 3 months. I think severance money should not be treated the same way as notice pay which is paid to employee when fired for non-performance. Severance is paid when organisation has decided to lay-off people when it decides to take actions which were not foreseen earlier and people being laid-off may not be responsible for it. Hence, government should immediately intervene and bring in standards for deciding severance whereby employees in probation should also be entitled to an equal or higher severance pay than permanent employees as they are less likely to find jobs given their inexperience.

Also, the govt should introduce tax incentives to people facing lay-off as last thing, not only on their severance money but also maybe a tax credit/refund for tax paid in earlier years because in current scenario when everyone if firing/laying-off, majority of these people are less likely to land a job anytime soon and people would definitely like to see a portion of their money coming back which hey paid to government in their good times.

To sum-up, people being laid-off need the help of the govt as the employers are mostly going to be ruthless in paying severance and govt has made good hay in past few years from these employees and it is its time to pay back.

Raise Tax Exemption on Interest on Home Loans

India has been facing tough times off late -like most of other countries, in terms of coping with inflation. Finance Ministry as well as RBI have been losing their sleep over the same and have taken very dynamic approach to curb the same by raising interest rates and reducing liquidity from the system, resulting in stemming it temporarily. The idea has been to reduce money in the hands of the speculators who leverage arbitrage opportunities by borrowing cheap and hoarding supplies of whatever goods are available in the market viz. bullion, oil, commodities, real estate etc.

But in the process are squeezed the masses -who took loans to discount their future incomes and bought a car, home or just anything for actual consumption. Though rates on car loans and personal loans are mostly fixed (Thanks, God), home loan rates are floating (except for less than 1% people who got it for a lifetime fixed rate) and have increased from 7% to 12% i.e. if you bought a home with 25 lakhs loan 3 years ago, you now pay 3 lakhs as interest innstead of 1.75 lakhs. EMIs have gone up from Rs. 800 per lakh to over Rs. 1100 per lakh.

However, FM has refused to assuage this pain by not raising this ceiling for several years now on deduction available on interest paid towards home loan. Such a step could've indicated that he's concerned for real consumers as this benefit actually goes to people who've incomes shown in their IT returns and is available on benefit of one loan for one person basis (for self-occupied). People are already sitting on negative MTMs on their purchases (which may get worse in time to come on account of continuous bad news from US), and any further rise in rates may force India into its own subprime crisis with people losing affordability to pay for their own homes. New buyers are also discouraged as even in 2nd tier cities, a 2 B/R flat would be upwards of 25 lakh as compared to 8-10 lakhs in 1999 since when 1.5 lakh ceiling is applicable. Thus, FM has not been able to keep pace in terms of its own thought process of benefitting real users. Maybe, this ceiling can be different for different cities as is the case with HRA.

Though some steps have been such as reducing risk weightage on loans upto 20 lakhs, but one hardly finds a difference of more than 25 bps in loan rates. It could mean that Homefincos are actually not passing on the benefit or there actually isn't any.

Do participate in the poll on the right bar to indicate whether you agree or disagree with the same.

How to save tax on Windfalls i.e.Arrears and Bonuses?

Saving tax on salary has few options, e.g. HRA, the Rs 1 lakh investment slab, interest on education loan, amount spend on children's tuition fees, interest on home loan etc. Apart from this, FBT structured salary package (discussed in article right below) leads to higher income in hand and depends on your employer's willingness -as it leads to compliance costs. At such a time, if you are in receipt of any arrears owing to revision in salary with past effect or for any other reason, you end up paying tax on the entire amount (provided you are already in taxable bracket). Section 89 deals with appropriating income to previous years' salary and thus alleviating tax pressure to some extent if situation allows for, but if you were already in taxable income bracket then even this too doesn't come as a succour. Similarly, the performance bonuses that you receive at the end of every year (and usually in beginning of next year) has the same effect. Is there a way to save tax on these windfalls? Yes, but at a cost, which per se is not a cost but an investment actually.

Let me begin with an example to understand what I am suggesting. Say

you have an annual gross income of Rs 12 lakhs p.a. i.e. Rs 1 lakh p.m.

Probably, Basic would be at 30k,

HRA would be 15k,

LTA would be 3k, Medical 1.25k, PF 3.6k, gratuity 2.5k,

and remaining approx 45 k as supplementary allowance.

Lets assume there is no FBT item. Your tax free salary'd be 25k of above items i.e. 3l p.a. plus 1 lakh of investments i.e. 4 l. If you've higher education loan, mediclaim etc then they too. You're left with approx 5-6l of taxable income (T.I.). At 5l of T.I., you need to shell out 60 grands plus cess i.e. 62k or 5 k p.m. Now, suppose you get another 3 lakhs as bonus in this year on top of this package and there's no way escaping tax on this, so another 93 grands you've paid as tax, so a total of 1.5l.

If you've a home loan, then you save another upto 1.5l as interest on home loan. Also, you may or may not get HRA benefit depending upon you're occupying that house or not. If yes, then even this deduction can be factored in with you saving more tax.

Now, this is not end of the story. One last source of saving tax for salary income is loss on housing property. The one you've claimed in previous para is limited to interest upto 1.5 lakhs. However, if you've another property with a loan on it, you get to save more tax. Here's how it works.

IT assumes your second and subsequent properties to be a source of income/loss and thereby allow adjustment of the same with salary income. So, say now if you've another house worth 50l with a loan of 40l, you'd be paying approx 4.8l as interest. Income typically is 3% of property value i.e. 1.5l. You are allowed a 30% deduction on this income towards maintenance. Also, if there are any taxes, they can be deducted. Assuming none, your ncome here becomes 1.05l. Subtracting this from interest of 4.8l leaves you with 3.75l of loss that can be adjusted against your T.I. saving you upto a max of 1.11l in taxes (if all of this is in highest bracket, else a lower amount). So, your cost of owning this house is interest cost 4.8l minus income of 1.5l and tax benefit of 1.11l i.e. 2.3l or you can say that here you've reduced your interest burden by half.

Therefore, if you have disposable income or you are receiving arrears/bonuses, consider buying a second house at a 50% interest cost. Also, rental income goes up every year as well as capital value of property and maybe in 3-4 years your income will overcome interest cost.

IMP: As per IT, if you have two properties, then irrespective of which you live in, you can claim which property you want to be treated as self-occupied and which one you show let-out. So, if you are already staying in/owning an expensive property, then you can buy a 15 lakh property and use it for 1.5l limit and show the other one as let-out.

From my experience with my colleagues, this fact is often not known to many salaried folks even though they might be owning two or more properties. So do let me know if it's news to you by participating in poll in right hand side. Suggestions/feedbacks are welcome. I'll make it a point to attend to them. Any other thoughts/queries related to tax is also welcome and so are recommendations/subscriptions.

Some related links:

http://www.rediff.com/money/2007/feb/13tax1.htm

http://www.moneycontrol.com/india/news/loansexperts/harshroongtahomeloan/twohomeloans=moretaxbenefit/market/stocks/article/304688

http://im.rediff.com/getahead/2006/apr/10home.htm

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Fringe Benefit Tax? Have we understood it now?

Ever since its introduction in 2006, FBT has remained a point of contention between employers, employees and FM/ITO. However, I feel that it is an opportunity to shift to a better tax friendly salary. If you are thinking that such restructuring of salaries can lead to reduced tax collections then look at the broader picture. There were organizations that chose to evade tax by paying lot of cash and thus totally evading taxes. On the other hand, the responsible organizations had to pay more tax thereby subsidizing non-tax payers’ for nation’s growth. Now, with FBT in place, this disparity starts disappearing slowly as more organisations are willing to pay taxes.

FBT rules has two advantages: one, it allows organizations to pay lower tax on some incentives like fuel expenses. Secondly, it allows employers to pass on the FBT to employees. Had the second not been there, employers might have chosen to pay incentives as salary and let them bear burden of higher tax on it. Now with lower effective FBT rates, it has become possible for people to enjoy higher income with same salary or cost-to-company.

Today, a lot of organizations have shifted to this regime, albeit with different degrees of flexibility. While some (typically large ones) tightly define the salary structure, others (smaller ones) are more flexible and letting each of their employee design their own package with a given CTC.

I think organizations should fully benefit from this regime as being employee friendly leads to better employee satisfaction and nothing brings more satisfaction than being paid MORE.

Lets Pay Fair Taxes

Indians dislike paying taxes (and so do many other nationals). And mainly, because of two reasons: one, we find the tax rates are a tad too high; and second, our taxes are not fully utilised to serve us. However, evasion of tax is a crime and its best that we leave our thoughts for wishful thinkings and pay our dues obediently. Maybe, we can participate in surveys invited by FM every year befor ethe budget and voice our thoughts, too. But till our tax system improves, lets figure out how can we reduce our liability rightfully.

I would like to share my ideas on the same and invite you to share your ideas too.

Hail Money !!!