Explaining Budget proposals: Headed for lower tax and no exemptions, says FM

NEW DELHI: Finance minister Nirmala Sitharaman said the idea behind the new regime unveiled in her budget is to “eventually move towards lower tax and remove exemptions.” At a media briefing on Sunday, she said, “We have made cuts for the middle class, lower middle class… The idea is to eventually move towards tax rates (that are) significantly lower than prevalent today; a regime simpler to comply (with); and (to) remove exemptions.”
Sitharaman defended the new regime, saying it will definitely benefit taxpayers in certain brackets, if not all. “Because income cuts are deeper in the new scheme, we believe a taxpayer from a particular income bracket will be much better off coming into the new system,” she said. “And the new system, however much I repeatedly say has no exemptions, (does have) some exemptions we have allowed.”

The government would issue more clarifications if needed. A list of exemptions still available to those opting for the lower slab rates was issued late on Saturday.

“Last night, one set of clarificatory notes was released… today, there will be more,” said the finance minister. “(As for whether) the new scheme will eventually result in people paying more than in the old scheme — why would I come up with such a system?”

Sovereign Guarantee For LIC
Asked about the status of sovereign guarantees enjoyed by policies issued by the Life Insurance Corporation of India (LIC) after listing, she said the government won’t be exiting the state-owned insurance giant. “It’s just an IPO (initial public offering).”

Debt ETF
Sitharaman said the second tranche of the bond exchangetraded fund (ETF) is likely within the current quarter, after success of the first bond ETF launched recently. “The government proposes to extend this by floating a new debt ETF consisting primarily of government securities,” she said on Saturday. “This will give retail investors access to government securities as much as giving an attractive investment (destination) for pension funds and long-term investors.”

LTCG Utility
Sitharaman said the decision not to remove long-term capital gains (LTCG) tax on equities in the budget was taken because utility of the tax had not been tested due to poor market conditions.

“Had the market been at a high, then we would roughly have been able to estimate what amount (it can give us). We didn’t have that advantage, so it remains there,” she said, adding that there were many demands — not just from the market but from many other quarters. “We tried to accommodate some. We accommodated DDT (dividend distribution tax), not LTCG.”

DDT was scrapped in the February 1 budget. “LTCG tax was introduced two years ago,” she said. “Much before we could see what could be generated out of it, the market tanked and it couldn’t give us any substantial returns. I said, ‘You have to wait for at least one year, by the old definition.’ We are talking of clarity, and just at that time when LTCG would have been lucrative, the situation was such that the market wouldn’t have been able to deliver that kind of return... As the time was coming for calculation of long-term gains, there was a depression in the market.”

Sitharaman said, “If the tax was not giving anything much, it’s not fair to withdraw it, as I didn’t even have a calculation of what could have come out of it.”

Market players were anticipating a rollback of LTCG tax as well as an extension of the holding period to qualify for the tax.