Surcharge Sinha hits the already-squeezed middle class where it hurts most: the pocket
The 5 per cent surcharge takes the maximum personal income tax rate to 31.5 per cent, from 30.6 per cent, while the Section 88 rebate (granted for investment in PPF, insurance etc) has been halved from 20 per cent to 10 per cent for those earning Rs 1.5-5 lakh, and there’s no rebate at all for higher salaries. At this rate, the FM may forever be remembered as Surcharge Sinha!
Says Sanjay Grover, partner, Arthur Andersen: "The first impact is on everybody who earns above Rs 65,000 a year because the net tax hike is 3 per cent. The changes in Section 88 will impact the small and medium-salaried person. Avenues to invest are getting limited because of interest cuts."
There’s also the dividend tax, which broke the heart of taxpayers and stockmarkets alike. Says Vinod Jain, chairman, financial markets committee, ICAI: "It makes things more complicated for the government. Earlier it was easy to check the corporates and collect tax at one source but now administrative costs and paperwork will go up. Several shareholders (both individuals and corporates) will not file returns. And FIIs will all hide in Mauritius through the double taxation treaty."
Sinha has dealt a harsh blow to the middle class by also extending the service tax on a range of products like life insurance, beauty parlours, rail travel agents, cable operators, dry cleaning services etc. This will have a cascading effect on the average spending of a household. Plus tax benefits are out. Says Jain: "Due to Section 88 changes, the new I-T liability on individuals earning Rs 1.5-5 lakh will be Rs 8,000, while for the upper bracket, it’ll be around Rs 16,000. The net impact will be on savings. Though the FM has estimated an extra Rs 6,700 crore revenue, I’ll put it much higher at Rs 20,000 crore."
But Sinha has liberalised the perks taxation, a cause of serious heartburn last year. The employer now has the option of bearing the burden of tax on non-monetary perks. Like if he decides to pay the tax on the house rent of an employee. But since he can’t consider that as deductible expense, few employers may do so.
Even if one accepts that all exemptions must go as they just complicate the tax structure, the security argument doesn’t justify the surcharge. Out of the Rs 6,700 crore income from this, the share of personal income tax is only Rs 2,600 crore. But the FM saved Rs 5,000 crore in defence this year, so the fresh increase in outlay next year is only Rs 3,000 crore. So why take money from the citizen under false pretences?