Smells of roses, but there're 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 50,000 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 is a reduction in taxes to the tune of Rs 24,480.Also, the surcharge of 10% will now be applicable if income exceeds Rs 10 lakh from the existing Rs 8.50 lakh.
Women and senior citizens also stand to gain, as they will now have a separate exemption limit. For women, it will be at Rs 1.25 lakh and for senior citizens, it will be 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. The Sec 88C benefit for women, which provided tax rebate up to Rs 5,000, and Sec 88B used by senior citizens for tax rebate up to Rs 20,000 have been eliminated. For domestic companies, the corporate tax rates have been reduced from the existing 35% to 30%.
However, it''s not a bed of roses. The thorns in the bush exist in the form of introduction of fringe benefits tax. Its provisions will be applicable if the employer has incurred any expense for the purpose of entertainment, festival celebrations, gifts, use of club facilities, conveyance, tour and travel, and maintenance of 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 on any single day.
In terms of investment, a taxpayer will now be allowed a consolidated limit of Rs 1 lakh for savings. But rebate under Sec 88 and Sec 80L is taken back. This makes PPF the only instrument for a tax-free return. The silver lining could be that investment decisions will now be based more on fundamentals of investing rather than saving tax.