Budget 2009 has indeed been strange. It was widely expected that the first budget in the new term of a resurgent UPA unhindered by coalition forces would bring in big bang market friendly measures. There would be major policy announcements on pressing issues such as disinvestment, fuel policy, FDI, the worrying level of fiscal deficit etc. However, none of this happened.

Acutally, the first impression that one got, immediately after the budget speech was that it was rather a non-event. However, the fine print contains a number of amendments to the law that the budget speech chose not to mention. While a detailed analysis follows, it must be said that a number of these changes are at the micro level -- fine tuning and fixing loose ends rather than any ‘big picture’ measures.

Significantly, the Finance Minister in his budget speech announced that a new Direct Tax Code will replace the current Income Tax Act and the same is going to be introduced within 45 days. One can’t help but get the feeling that the tinkering exercise that Budget 2009 eventually turned into is a precursor to the new Tax Code. Watch this space for updates.

In the meanwhile, the following are the major highlights of Budget 2009
1. Income tax slabs increased marginally.
The basic exemption limit has been increased by Rs. 10,000 for men and ladies and by Rs. 15,000 for senior citizens. This would translate into a tax benefit for Rs. 1,000 for non-senior citizens and Rs. 1,500 for senior citizens respectively.

2. Surcharge on income tax abolished.
Simultaneously, the 10% surcharge has been discontinued for all categories of taxpayers except for corporates. Since for individuals, surcharge was only applicable to income above Rs. 10 lakh, this move will essentially benefit only the higher income group. In other words, the highest tax rate has come down from 33.99% to 30.9%. The 3% education cess stays put for all taxpayers.

Income Level Applicable for FY 08-09 

3. No surcharge or cess on TDS
Currently, all income subject to TDS is subject to the levy of the 3% cess and if such income is above Rs. 10 lakh, even surcharge is applicable. Now, in all cases, surcharge will not be applicable for TDS. Moreover, the education cess will only be applicable in the case of TDS deductible on the income of NRIs, foreign companies and the salaried class.

4. Fringe Benefit Tax (FBT) no longer applicable
One man’s meat is another man’s poison. Abolition of the much hated FBT is good for employers but not so good for employees. The reason is that all many of those items that were taxable as FBT will now be subjected to perk tax in the hands of the employees. Admittedly, the FBT in most cases was being transferred / borne by the employee – however, such FBT was @6.8%. Now since items earlier under FBT will be added to the employees income as a perquisite, the tax will be applicable at the slab rates which in all cases are above 6.8%.

For example, immediately after the budget speech, a section of the media had hailed abolition of FBT as a beneficial amendment. Take Employee Stock Options (ESOPs). While, ESOPs will no longer be subject to FBT, now they will be subject to perquisite tax in the hands of the employees. The perk tax will be the difference between the Fair Market Value (FMV) of the shares on the date of exercise of the options less the exercise price. The story does not end here. Upon sale, capital gains tax will also be payable. Capital gains will be calculated on the difference between the sale price of the shares as reduced by the aforementioned FMV.

5. Scope of gift tax extended.
Readers may know that as per Sec. 56, any sum above Rs. 50,000 in the aggregate received from non-relatives was taxable as income of the recipient. Since these provisions were applicable to ‘a sum of money’, hitherto, non-cash gifts used to escape this gift tax net. For example, one could gift say shares to anybody else (not necessarily a relative) and yet escape paying any tax on this transaction. Budget 2009 has effectively plugged this loophole.
Now, the value of any non cash property such as land or building or shares and securities, jewellery etc. gifted without consideration will be subject to income tax in the hands of the recipient.

For immovable property the stamp duty valuation will be considered whereas for movable property, the fair market value on the date of the gift will be considered for arriving at the assessable value.

6. Scope of Sec. 80E deduction extended.
Section 80E provides for a deduction in respect of interest paid on loan taken for higher education. Now additional fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central or State Government will also be covered.

7. Sec. 80DD limit enhanced
Section 80DD offers a deduction in respect of medical expenditure on a handicapped dependant.  The present limit for deduction is Rs.50,000 if the dependant is suffering from normal disability and Rs.75,000 if the dependant is suffering from severe disability.

The Budget proposes to increase the limit for severe disability to Rs.1 lakh. However, the limit for ordinary disability is proposed to be retained at the existing level of Rs.50,000. 

8. Additional incentive for quoting PAN for TDS
The government finds that non-quoting of PANs by deductees is creating problems in the processing of income tax returns as also for granting credit for TDS. In order to strengthen the PAN mechanism, it is proposed that any person whose receipts are subject to TDS i.e. the deductee, shall have to mandatorily furnish his PAN to the deductor failing which the deductor shall deduct tax at source at the rate applicable or 20% whichever is higher.
This would also be applicable for those who file forms 15G or 15H. Forms 15G and 15H are filed by investors requesting the institution concerned not to deduct tax at source. What this means is that if these forms are filed without quoting PAN, TDS will be deducted and that too at the rate of at least 20%.

9. Tax benefits for New Pension System (NPS)
Investment in NPS (now open to all citizens) attracts tax benefits under Sec. 80CCD. This deduction was hitherto available to “employees” only. However, Budget 2009 has amended Sec. 80CCD so as to extend the tax benefit thereunder also to “self-employed” individuals.

A significant point of note here is that there is a limit of 10% of salary on the amount of Sec. 80CCD deduction for employees. Since there is no mention of any similar limit for non-employees, it may be inferred that for this category the overall limit of Rs. 1 lakh will be applicable.  

10. Advance tax limit doubled
Advance tax needs to be paid if the tax payable for any financial year is Rs. 5,000 or more. This limit is being doubled to Rs. 10,000

11. Wealth Tax threshold doubled
Currently wealth tax is charged @1% in the net wealth exceeds Rs. 15 lakh. This limit too is being doubled to Rs. 30 lakh.

The writer is Director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com