Why making ends meet is going to get tougher

Apr 11, 2023

Veteran investment adviser and writer R Balakrishnan on the tax collection mechanism of the government turning hostile. The digital system gets more efficient and the process is pleasant, but the outcome is not.

Many financial products are sold with the carrot of tax exemptions or deductions being offered. It was important when the savings rates had to be constantly pushed higher and formal sector earnings were low. The situation is different today.

There is a high ‘formalisation’ of income and with technology, few streams escape the tax net. Probably real estate, gold and precious stones are the last three asset classes where cash is still in use in a big way and skips the tax net.

Formal sector earnings are growing. The savings pie is getting bigger. The government probably feels that whether there is some tax gain or not, savings will happen.

Not just withdrawal of tax credits, but other issues too.

One of the ugliest things in the history of personal taxation is the TDS on remittance of money to your children who study abroad. As it is we scrape the barrel to find enough money to send them for further studies. And on that, the government wants a share.

The levy of GST on something like the premium on medical insurance is another blow. I have never seen such debased tax behaviour.

At one time, the Finance Minister had logically eliminated capital gains tax and imposed STT on shares and securities. That is history. Capital gains tax has been reintroduced.

Deductions and exemptions are now the domain of big business. For the politician, it is big business that provides revenue for the parties and they have to be kept happy. Hence, schemes “promoting business” will always find their place in the Union Budgets, or even outside it.

Politicians have provided themselves with all the financial security by way of pensions and freebies post retirement. Unfortunately for the salaried person, there are no social security benefits based on the income taxes that one pays during a lifetime. The country can consider giving back to those who gave; in any case the tax payers are not a large number.

Implication for the investor:

  • Err on the side of caution.

If you are working on a long-range plan (20 years or more), assume that every income stream is going to become taxable.

I also see a situation where mutual funds and insurance companies will be taxed on their share market trades. Today they churn without bothering about tax implications. Once they are taxed, the industry and the returns will undergo a sea change in terms of returns and return expectations.

  • Be aware.

It will be a gradual and painful process as we see our investment returns falling. Even simple things like TDS/TCS is a tool to reduce our savings. Many people may not do what is needed to avoid TDS/TCS and will have to claim it as a refund from the government. Surely not everyone will do so, and the government will legally appropriate these unclaimed monies.

We bought listed debentures because there was no TDS. No more. So now, if your income is below the taxable limit and do not file returns, you will have to file returns to claim your refund. Many will simply not bother.

  • Be diligent.

Ensure that you have a Will in place and investments are nominated or held jointly. In a sudden death, your family could lose it all.

Bank deposits, shares and dividends which are unclaimed for over 10 years goes to the government. The process to reclaim the money is a herculean task; most will either give up halfway or die before the process is completed.

  • Tax Planning is going to become less important as we move forward.

The last two things left with some tax savings are the postal deposits and the PPF. I am sure that the present Finance Minister would like to do away with this. At this rate at which tax is being levied on every single aspect of investing, it is quite probable that the proceeds of the PPF or even tax-free bonds could well be considered for taxation. In case you think I am being overly pessimistic, let me remind you of the idea floated that tax should be levied on cash withdrawals from the bank.

However, I want to point out that the states get a share in the mobilization and will oppose this. Till that issue can be addressed, PPF and postal savings schemes will probably be kept alive.

  • Inflation and Tax will eat away your wealth.

In 70+ years of self-rule, we still do not have a stable taxation rule book. Every year, the Union Budget fine print throws up more and more surprises.

For the salaried, everything gets taxed. Often, more than once. All our savings come from tax-paid money. It has suffered taxation once (income tax). We invest this to make money, and once again we are taxed. At the same time, if we lose money, we cannot set it off against some other income. Only a business entity can choose these flexibilities.

There are multiple stages of successive taxation on his income and all the favours go to big business. The effective rate of taxation on a businessman is far lesser than on a salaried person.

Save. Invest. Don't assume that all will be taken care of. Prepare for the worst. That is the only way to survive.


STT: Securities Transaction Tax TDS: Tax Deducted at Source TCS: Tax Collected at Source GST: Goods and Services Tax

TDS under GST is tax-deductible by a buyer of goods and services while making payments under a business contract. TCS under GST is the tax that an e-commerce business collects when merchants sell goods or services via its website, and the e-commerce platform takes payments on their behalf.

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