Budget 2010 – It’s a win-whine story

By BankBazaar.com | February 26, 2010

The major cause of celebration was that people earlier in the 30% slab (those currently earning between 5-8 lakhs) have now been shifted to the 20% rate of income tax and those in the 3-5 lakh group have shifted to a lower 10% rate of income tax. Add to this the deduction of Rs 20000 for investment in long term infrastructure bonds and it does seem a neat saving on the tax outflow of the middle class Indian.

The above “win” situations would result in the government loosing close to Rs 26,000 crores. Where will this money come from? The answer to this would reveal the reason why the budget could be a whine story on the long run.

At first look for the budget seemed to bring cheers to the faces of middle class Indians (defined as people earning below Rs. 8 Lakhs as taxable income), what with the increase in the slabs for income tax calculation helping us save anywhere between 20000 to 50000 based on roughly calculated tax savings. But, once the budget speech got over and the initial hoopla died down, it seems like the finance minister has done a marvelous job of giving in one hand and taking away on the other.

The Win Factor

The major cause of celebration was that people earlier in the 30% slab (those currently earning between 5-8 lakhs) have now been shifted to the 20% rate of income tax and those in the 3-5 lakh group have shifted to a lower 10% rate of income tax. Add to this the deduction of Rs 20000 for investment in long term infrastructure bonds and it does seem a neat saving on the tax outflow of the middle class Indian.

The above “win” situations would result in the government loosing close to Rs 26,000 crores. Where will this money come from? The answer to this would reveal the reason why the budget could be a whine story on the long run. (PS: for the sake of objectivity, it must be accepted that not everything about the Budget 2010 is a whine story. This article tries to only look at the negative aspects- Other pieces will highlight the positive aspects)

The Whine Factor

Factor 1: Increase in Petroleum duties

The Central Excise duties on petrol and diesel have been increased by Re 1 per liter. Add to this the increase in basic duty by 5% for crude, 7% for diesel and petrol 7.5% and 10% for other refined products. This would mean we can see a price hike in the Petrol and Diesel prices in the range 0f Rs. 2 to Rs. 5. This would surely have a spiraling effect on all the commodities which depend on transportation of goods. This essentially means everything from vegetables to food grain to eggs to equipment. Thus resulting in a price hike of everything that you buy and get home. This would mean that though you would save around 20-50k per year on taxes you might actually spend 3-10k more per month due to price hikes. Something to whine about. It does not end here. Read on. (By the time this piece was written there’s news that prices of petrol and diesel are being hiked tonight-26 Feb 2010)

Factor 2: The increase in funding to NREGS

How can something that gives employment to crores of poor people be a cause for whining? Well, the true story is that the NREGS has resulted in workers earning easy money where earlier they had to toil in farms to earn the same. So what, one may say? What happens when these hard working laborers leave the farms to go and work under the NREGS? The farmers face shortage of labourers. This in turn has already resulted in farmers winding up agricultural land to create housing plots or paying more to the few labourers left behind. This would surely have an addendum effect on the prices of their produce which will indirectly be borne by the end user- the middle class Indian eating his dal roti!

Factor 3: MAT increase

The MAT has been increased by over 80% in a period of one year (starting from the hike from 10% to 15% in the last budget to the hike of 3% to 18% from 15% in the current budget). This would mean that many manufacturing industries (having large depreciation component) will be paying more tax. It will not take a scientist to understand that, in the long run, this will be recovered from the end customer – the middle class Indian.

Factor 4: Standard rate of Central Excise on non-petroleum products

Apart from the hike in the excise duty of petroleum products, the Budget has also proposed increasing the standard rate to 10% from the existing 8%. This again would result in a long term increase in the prices of most manufactured products. And as usual this negative cash flow for the manufacturer will be recovered from the end user – the middle class Indian.

Factor 5: New additions to the Service tax list

Many services which are currently not in the service tax purview will be brought. Although it has not been specified which of the services will be brought into this list, the fact that Service Taxes will bring a net gain of Rs 3000/- crores for the government indicates that many commonly used services could become liable to pay service tax. The common man will have to bear the brunt if he uses these services.

Final thoughts

As seen above although the Finance minister has brought cheer to the individual tax payer he has increased the burden on corporate India which would result in a sure price hike of commodities and services across the spectrum. The coming weeks will give a clear picture on the expected increase in prices and their pinch on the pocket. Till then enjoy the tax savings.

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