Analysis of Tax reforms in Budget 2015

  1. Proposal to reduce corporate tax from 30% to 25% over the next 4 years increase indirect tax.

Implications:

  • The proportion of tax payers is low in India and the black money is one of the major issues hindering the growth in India. So to have a better control over black money, government has reduced the corporate tax and is increasing service tax because everyone will be included in this tax. However in doing this, even the economically weaker segment will be affected.
  • This may promote higher level of investments in business because of decreased tax they will have to pay. Also the government has proposed reducing the import duty on certain inputs, raw materials & intermediaries. However government is planning to increase the indirect tax. This will increase the price of commodities.
  1. Abolish wealth tax & increase surcharge by 2% on individuals earning more than 1 crore. 

Implications:

  • This leads to higher payment of tax by wealthy people. By this government will be in a position to raise more money (with the proposed plan, government will be getting 9000 crore in the place of 1,008 crore from richer segment of people.)
  1. Also mandating mentioning PAN number on any transactions beyond Rs. 1 lakh to avoid illicit transaction & stringent laws against black money and impresenment of 10 years for concealment of taxable assets 

Implications:

  • This improves the percentage of tax payers and also brings more transparency in any high value transactions because of the assicialtion of PAN numbers in all transactions.
  1. Eliminate GAAR in India in 2 years down the line

Implications:

This encourages fund managers to relocate back to India leading to more job creation.

  1. Excise duty on sacks and polymers of ethylene to be increased from 12% to 15% for non industrial use & 100% tax exemption for spending on Swachh Bharat Abhiyan, clean Ganga & prime minister Relief fund. Increase in clean energy cess from Rs.100 to Rs.200 per metric tonne of coal and extend the time period of concession on customs and excise duty available to electrically operated and hybrid vehicles till 31/03/2016.

Implications:

Discourage usage of plastics by common people because of increased price. However it keeps industrial segment unaffected because tax is unaltered for this segment. This is in a way to promote Swachh Bharat Abhiyan. Also the amendment on tax exemption on spending on Swachh Bharat Abhiyan promotes more spending of corporate on cleaner India as a part of their corporate CSR activity.

Increasing the clean energy cess also discourage using coal and promotes usage of more green and sustainable energy resources.

  1. Tax exemption savings limit increased from 1,00,000 to 1,50,000 and provide additional tax benefits of upto 50,000 INR for contribution to New Pension Scheme under 80 CCD. 

Implications:

This would promote more savings by the people which leads to higher liquidity with the government. This enables the government to have a better control on fiscal deficit which is of major concern for India.

Also introduction of tax exemption under savings scheme enables bring pension for people post retirement in India improving the quality of life of people post-retirement.

  1. Income tax exemption slab increased from 2.5 lakh as that of previous budget to 3 lakh in the current budget. The lowest taxable slab (10% tax) widened from 2.5 lakh – 5 lakh to 3-10 lakh . 30% tax on income beyond 10 lakh per anum. Additional 10% surcharge on superrich segment (income of more than 1 crore – 42,800 individuals fall under this category.) making it 33% tax.
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Implications:

Reducing the tax rates decreases the motivation for black money. It also helps middle class money because they will be left with relatively more money when compared to the previous budget.

  1. No changes on import duty on jewellery and making PAN number mandatory in any purchase of jewellery more than 1 lakh.

Implications:

This puts more pressure on organized jewellers because high duty motivates more smuggled gold and making PAN number mandatory on purchases above 1 lakh on jewellery motivates people to purchase from illicit jewellers making it difficult to run business for organized at either ends of the business.

  1. Budget is cutting customs duty by 2.5% on import duty on components for premium consumer electronic durables like frost-free refrigerator and microwave ovens to promote make in India campaign.

Implications:

Cutting the excise duty on premium electronic products will not make much difference for companies to assemble in India because the price of these commodities are high and hence the market share for these commodities is low. Also the cost savings in doing this for the companies is hardly 50-60 rupees on each of the product which is not viable because they can play neither volume game nor margin game to maximize profits.

  1. Increase in customs duty on commercial vehicles from 10% to 40% on commercial vehicles (Does not include electric and hybrid vehicles).

Implications:

This is done to protect domestic players from high competition because of foreign players. This is also targeted to have a better control on petroleum consumption.

  1. Excise duty on cigarette not exceeding 65mm increased by 25%

Implications: Cigarette sector under pressure. ITC share price fell by 11% before closing on the day of announcement of budget. This is done to discourage usage of cigarette

  1. Service tax increased to 14% from 12.36%. In addition to this, government can also increase service tax by 2% effectively making it 16% as swatch Bharath cess.

Implications:

This increases the cost of all eating out, entertainments, movies and other services putting pressure on households and dampening the revival of companies. However there is a reduction in corporate tax and income tax relaxation offsetting this influence. This is done to reduce the black money in the economy because people will be forced to pay service tax upon purchasing goods & services.

 Observing the above measures of the budget, it can be inferred that it is a contraction budget aiming at reducing fiscal deficit and to regulate liquidity to have a better control on inflation and increase more clean money in the nation.

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Analysis of Tax reforms in Budget 2015

by Venkatesh KG time to read: 5 min
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