Tougher times ahead for aam aadmi

Written by fe Bureau | Updated: Mar 1 2011, 07:28am hrs
Praveen Nigam, CEO, Amplus Consulting

On the face of it, the Budget doesnt seem to have any major tax and other implications. But on close scrutiny, it reveals that the aam aadmi will have tougher times ahead as there are no significant relaxations for him, but everything he needs on a day-to-day basis is set to become expensive, like medical treatment and diagnostics, travel, hotel stay and even a nice evening in a restaurant.

In the previous Budget, specific services provided by the hospitals were taxed with specific conditions. Now all the services provided by hospitals (25 or more beds) with central air conditioning will be subject to service tax, with an abetment of 50%. The same is also applicable to all kinds of diagnostic centres. This will greatly impact the cost of medical and diagnostic services that are already costly.

Air travel is also set to be more expensive, as the service tax on air travel has been raised to R50 on domestic travel and R250 on international travel (economy class). The higher classes on domestic sector will now be charged at 10%. This is in line with international travel.

Again, the aam aadmi will be burdened as the insurance policies with investment will now become expensive. The services provided by life insurance companies in relation to investments shall now be taxed like Ulips.

While the cost of compliance will come down for small retail players, individuals and sole proprietors having turnover of up to R60 lakh, as they will be exempted from service tax audit, the shifting of liability from cash basis to accrual basis will put a lot of additional working capital burden on all enterprises. The move will be highly detrimental to the industries where the payments are subject to verification of invoices like large works contract and security services.

From a corporate perspective, too, no changes are made in the tax rates. However, there is a reduction in surcharge from 7.5% to 5% that will result in an incremental disposable cash in the hands of corporates. Also, an increase in the MAT rate from 18% to 18.5% will act as a dampener for the companies that are still falling under MAT regime.

The only positive takeaway from the Budget is the small increase in the general exemption level in the income tax of the salaried class.

These measures will definitely result in ensuring slight positive change in the purchasing power of the consumers, thereby helping in increasing the demand for consumer goods to some extent. Also, the one-year extension of R20,000 for investment in infra debt funds and the relaxation given from e-filing norm to 'small taxpayers' is a welcome move.