Budget 2016: Impact of Budget on Direct Taxes

The finance minister has been largely neutral on the direct taxes front. Here are some of the key changes that have been announced or where status quo has been maintained. Some of the key highlights are as follows:

  • The income taxes have been kept largely static. However, the government has made an attempt to benefit the small tax payer in two ways. Firstly, there is a small tax benefit for the lower income categories. Secondly, there is an additional benefit provided in the form of Section 80GG for rent paid where the benefit has been increased from Rs.24,000 per annum to Rs.60,000 per annum.
  • The much feared long-term capital gains tax has not come in and that is good news for the capital markets. There was an expectation that long term capital gains tax could be reintroduced which has not happened.
  • The FM has introduced an additional 10% tax on dividends received. Currently, dividends are subject to dividend distribution tax (DDT) deducted by the company paying the dividends. Now an additional 10% tax will be levied in the hands of the receiver of dividends provided the dividend received is more than Rs10 lakh per annum. This implies direct tax on the dividend received, over and above the existing DDT.
  • Corporate tax rates were supposed to be cut by 5% over 4 years. The first such cut was expected to happen this year. However, the budget has been silent on the subject of cutting rates this year considering the revenue implications. However, for smaller companies and new companies. there is the option to directly move towards the 25% tax rate provided they do not avail any of the exemptions.
  • What is more important from direct taxes perspective is the introduction of VDIS or a Voluntary Disclosure of Income Scheme. The VDIS will charge a rate of 45% on the income declared as against the 60% in case of back money stashed abroad. This could incentivize a lot of people with black money to come clean on this front. The 3-month window will be only for domestic black money that has been deliberately penalized at a lower rate than foreign black money.
  • The Voluntary Resolution of Disputes (VRID) is another scheme that has been brought out in this budget. Under this scheme, the individual is permitted to close pending litigations by paying a sum of tax. This will be a big relief as thousands of crores of money that is stuck in litigations and disputes can be partially released and revenues can be raised.
  • The FM has clarified that neither long-term capital gains will be taxed, nor will the definition of equities be increased from 1 year to 3 years. This clarification gives the much needed relief to investors.

The direct taxes front has been largely left untouched. The two new introductions pertain to the VDIS and the VRID. They are also supposed to be a fund raising mechanism for the government.

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