Hidden Landmines In Budget
Gautam Nayak
Chartered Accountant
ssnco@vsnl.ccom
Every year, the Finance Minister’s budget speech outlines the
beneficial provisions of the Finance Bill. But, invariably, hidden away in the fine text
of the Finance Bill are a few provisions which are detrimental to the interests of most
taxpayers. Given the good intentions of the new Finance Minister, one thought that this
year's Finance Bill would be different. However, this year too, there are a couple of
provisions which would seriously affect investors.
The first such proposal is the insertion of a new section 10(33), which
grants an exemption to income arising on transfer of units of Unit Scheme 1964 made on or
after 1st April 2002. On the face of it, it appears to be a very laudable
provision, granting an exemption to investors. However, when one examines the background
in which this provision has been inserted, the implications are quite startling.
Most investors had invested in units of Unit Scheme 1964 at rates
ranging from Rs 12 per unit to Rs 16 per unit. All these investors would be able to encash
their units only at a price ranging from Rs 10 to Rs 12 per unit, thanks to the losses
suffered by Unit Trust of India. This price is a part of the bailout package for Unit
Trust of India formulated by the Government. Therefore, on encashment of the units all
investors who have invested before July 2001 in units of Unit Scheme 1964 would invariably
be suffering a loss, thanks to the mismanagement of the scheme by Unit Trust of India.
It is well accepted in interpretation of tax laws that the term
"income" would include "loss". Therefore, the implication of the
proposed amendment is that both gains and losses arising on transfer of units of Unit
Scheme 1964 would be exempt. In reality, this would mean that the losses suffered by
investors in the scheme would not be available for set off against other capital gains,
which would have been otherwise allowable in the normal course.
This provision therefore has the effect of rubbing salt into the wounds
of investors. As it is, investors have lost money due to government mismanagement and
interference in the affairs of Unit Trust of India. Now, the tax benefits arising out of
such losses are also being denied to them by the government. Not only that, since the
provision applies to all transfers after 1st April 2002, investors who have
already disposed of their units in the past 11 months are also hit by this amendment.
The second such proposal relates to life insurance policies, where the
premium payable in any year exceeds 20 percent of the capital sum assured (excluding bonus
and return premiums). In the case of such policies, it is now proposed to deny the benefit
of rebate under section 88 to the extent of the premium exceeding 20 percent of the
capital sum assured under the policy. Since this has prospective effect, and most life
insurance policies (other than single premium policies) do not have premium exceeding 20%
of the capital sum assured, this may not have a major impact.
It is the second part of the proposal which really affects many
investors. It is now proposed to do away with the exemption of maturity amount received on
such life insurance policies. This would mean that the amount received on maturity of all
such policies maturing after 1st April 2003 would now be taxed. This would also affect all
policies taken in the past by investors.
The real effect of this amendment comes into light when one realises
that this amendment would apply to Bima Nivesh policies issued by LIC in the past as well.
A large number of investors had invested in such policies on the basis that such policies
gave an assured tax-free rate of return of 7 to 8 percent in the form of cumulative
compounded bonus. They had paid single premium on such policies, almost equivalent to the
capital sum assured under the policies.
Now on maturity of the policies, the amount received by them (at least
the excess of the amount received over the premium paid) would be taxable, upsetting all
their calculations made at the time of investment. In effect, the tax-free rate of return
is post investment overnight transformed into a taxable rate of return, translating into a
huge 30 percent loss for most investors. When one considers the large amount of
investments made under this policy, the amount of losses by way of tax is substantial.
One could have understood the need for such an amendment, but then such
an amendment should be made applicable only to policies issued after the date of the
amendment. Making it applicable to policies issued in the past amounts to cheating
investors, by initially luring them with attractive tax-free returns, and then changing
the rules of the game.
These two amendments should certainly be reconsidered by the Finance
Minister if he sincerely wishes his budget to be a Citizen’s budget in reality, and
not just in name.
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