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Monday, March 19, 2012

2 hyped tax proposals in Budget 2012-13 that deliver very little

Accountants and lawyers would be well acquainted with substance over form doctrine, but what is form over substance? Well, that refers to the principle of preferring the strict statute over any other common interpretation(as done for penal/tax statutes), but in this case I refer to those tax provisions that have made great media headlines, will be enacted as well, but do not give any substantial benefit
  1. 50% tax deduction for investments up to Rs 50000: This proposal named after Rajiv Gandhi(who already has an IIM etc named after him but I digress), confers 50% tax deduction on those investing upto Rs 50,000 directly in equities, and who have a taxable income of less than Rs 10lakh. Now, given that the tax slabs will have marginal tax rate of 20% in that bracket, that means the relief(in cash flow terms) will be 50%*Rs 50,000*20% i.e Rs 5000 i.e 10% of the investment. This is in return for holding the shares for 3yrs! Now, when the holding period for long term capital gains itself is just one year, one can see the rationale for imposing 3yrs to make investors more long term! But, this provision is hard to enforce(which employer/taxman can go to the demat account of the investor and check whether holding is still done? If it was through a mutual fund, then lock in period can ensure the same, but somehow I doubt that NSDL/CDSL will devise a special lockin for shares invested during this scheme. So how will this be monitored? Also, can a 10% upfront relief be enough to make investors hold shares for 3yrs? If the success of the NPS is anything to go by wherein even matching first year contribution for low income beneficiaries has not helped the scheme much, one cannot say what will happen here
  2. Rs 10,000 deduction on savings bank interest:-It is an open secret that individuals still think their savings bank interest is exempt, and very few declare it on their tax returns. The few who come under the tax deduction limit just take it as it comes. So how can this provision confer people a benefit that they enjoy already(albeit illegally), or even induce them to save more(we already have an interest rate war among banks for that very purpose)

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