IncomeTax

Good news for parents of toddlers: The Latest Income Tax Circular, clarifies that Playschool fees qualify for tax deduction under section 80C, under the “full-time” education clause:

Full-time education includes any educational course offered by any
university, college, school or other educational institution to a
student who is enrolled full-time for the said course. It is also
clarified that full-time education includes play-school
activities, pre-nursery and nursery classes.

It may not sound like a huge deal to most of you but with the amounts these play schools charge nowadays, it’s some consolation to us parents.

Just a heads up. If you have such fees you probably are already at your 80C limits and don’t need to make more payments. If you’re an employee who is getting tortured by his accounts department to provide those 80C deduction receipts, hand them your child’s playschool receipts with a smug expression on your face and show them the above link.

The Income Tax Department has warned that any mails requesting credit card details are fraudulent.

Information has been received from several quarters that people are receiving electronic mails informing them of their income-tax refunds and seeking their credit card details. The email is sent from the following or similar mailing addresses –

<lhxbkw@accounts.net> or <cvhfvs@accounts.net>

It is clarified that the Income Tax Department does not send e-mails regarding refunds and does not seek any information regarding credit cards of taxpayers.

Taxpayers are, therefore, cautioned that they should not respond to such mails and if they do so it would be at their risk and responsibility.

[I’m passing the word on]

And if the Income Tax Department wants your credit card details, you can be dead sure they don’t need to ask you.

October 2009 data is now out, and total tax revenues are about 9% below last year to date numbers, at Rs. 2.14 trillion (lakh cr.) versus Rs. 2.33 trillion last year.

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As you can see, October taxes alone have dipped from 30K cr. to 28K cr. Think about it - October was Diwali this year, which is usually bonus time (so more direct taxes, one would think). But since TDS is paid by the 7th of the next month, it may not count in October just yeat. Diwali was in November last year, so some distortion will be apparent. (Additionally, there was a part of one-time government salary arrears - the fifth pay commission increase - paid out in October 2009, which should have caused an increase in net tax collections; only it doesn't look that way)

Let's take a look at the expenditure.

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As you can see, expenditure is up about 30% - from 4.08 trillion to 5.37 trillion, year to date. Basically, as a country we are earning less and spending more.

Further down on the page, is the terrible figure for the fiscal deficit. The total deficit now is Rs. 2.45 trillion versus 1.17 trillion last year : that's nearly a 50% increase in deficit from last year!

If we are really improving, it should show in our taxes. Let's see what December has in store.

I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we're in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

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Tax collections are down about 8% from April this year. September was the first month where the monthly collections were HIGHER than last year, but there have been one-time events like the second part of the payout to government employees (60% of arrears) that was made in September. In all the government isn't getting nearly as much revenue as the growing India story demands.

Direct taxes (think Income tax) seem to have gone up a little bit, a 4% growth with about 1.73 trillion (lakh crore) collected till October end , versus 1.67 trillion last year October end. (I really need to chart this)

There's two issues here - our tax collections which grew at a 20-30% clip in the last few years, from greater reporting and solid growth, have come down to negative or flat levels. This has two bearings:

• The deficit, at 6% of GDP (or Rs. 3 trillion) isn't going to come down much until tax revenues pick up. Our other sources of income are the fees from licensing like NELP and 3G allocations, and from divestment - won't quite add up to bridge the divide. And public expenditure (check the link) is going up at 33% or so.
• Where's the 6% GDP growth that we're talking about? How come people aren't paying a lot more in income and other taxes? (In times of 8% GDP growth, taxes grew 40-50% yoy) Maybe it's just the first few months and things will get better in the last six months of the year. But with bank credit stalling at 9.7% (yoy growth) I hardly see the signs that there's a big recovery happening.

The flip side of it? Most deductions are out, and it's a simplified bill. The lower rates will encourage compliance and weed out complex avoidance schemes.

But there are tons of online sites that talk about all the stuff in the code. Let me focus on one thing: the EET regime.

EET refers to Exempt-Exempt-Taxed. Upto 3 lakh a year starting 2011, certain investments - and I think by this they mean insurance, ELSS mutual funds, PPF and so on - will be exempt from tax in the year of investment. Then, as they grow in size, the growth is also exempt. Finally, when you withdraw the money the entire amount is added to your income and taxed.

Currently we have EEE - insurance and ELSS funds are exempt at entry, exempt on growth and exempt on exit. The limit is only 1 lakh a year.

Still, 2011 is hajaar far away - two more financial years away, in fact. Why should you bother? Because the EET regime changes a few things.

Investing money in tax saving instruments now will be taxed on exit - because they will exit only after 2011 (lock in is three years, minimum). So if an insurance agent tells you to buy an insurance policy because it's tax-saving, he's pfaffing - you will end up paying tax when you exit.

(This doesn't apply for PPF apparently; the tax code has a grandfathering clause that lets any accumulated balance in PF accounts as of March 31, 2011, stay untaxed even afterwards)

But it may still be worth it. A person earning 8 lakhs today will pay 30% tax on the 1 lakh invested. Should he get scared of EET and ditch? Well, he will get 70K today, out of that 1 lakh. But if he held for three years, and say there was zero growth, he will get 1 lakh in 2012, at which time let's say his income is 12 lakh. The 1 lakh he gets then will be charged at 20% only, a 10% saving. (It may not be much, but there is a saving)

But in all the participation in insurance and Mutual Funds should reduce today, even though the tax code only gets valid in 2011. At least till 2011, because one can get a better deal investing in a PF instead. Not very positive in the short term for MFs/Insurance companies.

Another impact of the tax code will be that interest on housing loans may no longer be exempt from tax. I'm not sure about this, though. And STT will go - which means long term cap gains tax is back.(sell all long held stocks and buy them back in March 2011!)