Bed of roses with some thorns

The big story of Budget 2005-06, is clearly the sweeping reforms in direct taxes. The exemption limit has been increased to Rs 1 lakh from the existing Rs 50,000. Income tax rates also underwent a major change with the existing slab of Rs 60,000 being increased to Rs 1 lakh and the highest slab of Rs 1.50 lakh being raised to Rs 2.50 lakh.
Therefore, at an income of Rs 2.50 lakh, there''s a reduction in taxes to the tune of Rs 24,480.The surcharge of 10% will now be applicable only if income exceeds Rs 10 lakh from the existing Rs 8.50 lakh.
Women and senior citizens also stand to gain. They''ll have a separate exemption limit. For women, it will be at Rs 1.25 lakh and for senior citizens Rs 1.50 lakh. However, there is a set-off factor. These exemption limits are in lieu of special benefits, which were earlier enjoyed by them. Sec 88C benefit for women which provided a tax rebate up to Rs 5,000 and Sec 88B used by senior citizens for a tax rebate up to Rs 20,000 have been eliminated. For domestic companies, the corporate income tax rates have been reduced from the existing 35% to 30%.
There is no change in service tax rates, though the net has been widened with introduction of nine more services. Also, exemption is provided for small service providers if the taxable service provided by them during the previous year was up to Rs 4 lakh.
The one-in-six criteria for filing returns has also been revisited with mobile phones being removed from the existing six and payment of electricity bills of more than Rs 50,000 per year being included.
However, it''s not all a bed of roses. The thorns in the bush exist in the form of introduction of fringe benefit tax. The provisions of this tax will be applicable if the employer has incurred any expense for the purpose of entertainment, festivals, gifts, use of club facilities, conveyance, tour and travel, repair and running and maintenance of motor cars, use of telephone etc. The value of fringe benefit will be subject to additional tax at a rate of 30%.
A new issue of debate has been opened with a levy of 0.10% tax on cash withdrawals of greater than Rs 10,000 from any scheduled bank on any single day. This has been done to tackle tax evasion, but could cause a lot of hardship even for genuine cash withdrawals.
If we look at the investment scenario, every taxpayer will now be allowed a consolidated limit of Rs 1 lakh for savings, which will be deducted from the income before the tax is calculated. In the same breath the rebate available under Sec 88 is now eliminated.
Also, the deduction in respect of interest on certain securities, dividends under Sec 80L is also taken back. This makes PPF the only instrument, which gives you a tax-free return.
The silverlining to this change could be that, now investments decisions will be based more on fundamentals of investing rather than tax savings as the determining factor. Interest rates have not been tinkered with. However, with interest earnings now taxable the net yield comes down for small retail investors who were earlier using the benefit of Sec 80L.