Union Budget 2018

What are the expectations on the direct taxes front?

Normally, the real area of interest in any budget is on the tinkering of rates as far as direct and indirect taxes. With GST, the scope for tinkering of indirect taxes is quite limited. The focus will now entirely predicate on direct taxes. From a thematic perspective, the last budget before elections has a strong populist tinge and this budget could also be more favorable towards the common taxpayer. There are 3 broad direct tax themes that we foresee

Pamper the middle class

The government has strongly believed in a progressive approach to tax. It basically boils down to reducing the burden on the vast middle class, which forms the backbone of the economy. The tax slabs have been recently tweaked and there may not much of a change there. However, the government may look at some additional sops for senior citizens to compensate for the lower rates on small savings. The Section 80C is a useful tool for saving taxes and also for investing for the long term. It is expected that there could be an expansion of the limit from the current level of Rs.150,000 and probably a separate niche for ELSS schemes. To give a boost to home ownership, the government could also look to expand the limits of Section 24 with special incentives for low cost housing. The government may also look at enhanced limits for medical insurance benefits to make it more aligned with reality!

Make the rich pay a little more

There could be some obvious steps by the government in tune with its approach to progressive direct taxes. Firstly, the surcharge on higher income groups could be increased or the limit could be brought down from Rs.50 lakhs. While the jury is still out on whether the government will introduce tax on long term capital gains, we expect some kind of a levy on capital gains above a certain level. This will be largely on the lines of the 10% tax on dividends above Rs.1 million. We expect that buybacks, which many companies are using as an alternative to dividends, could also come under some form of tax attribution. We also expect some announcement on taxation of Bitcoins.

Broaden the tax base

This is something the government has already started through the digitization effort. For a nation of 1.2 billion with a GDP of over $2.4 trillion, India’s tax base is abysmally low. Expect some big changes to bring more people under the tax bracket. This can be easily achieved by plugging the loopholes in the tax collection system. The combination of Jan Dhan, Aadhar and Mobile linkages will go a long way in widening the tax base. This budget could mark a major shift and announce some big bang efforts to enhance the reach. It has already begun and the trend could just get more pronounced post budget! ©

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