BY AMAR PANDIT, CEO – MY FINANCIAL ADVISOR
Intro: What the Finance Minister has given with one hand in the form of lower income tax burden, he has more than taken away by hiking indirect tax rates
In this budget the Finance Minister had to deal with the task of reining in a runaway fiscal deficit. So he has indulged in some jugglery. While he has offered some concessions to the salaried class on income tax, he has raised indirect taxes (both excise duty and service tax), which will have a cascading effect on the prices of a wide range of goods and services and adversely affect everyone’s wallet.
Income tax burden reduced
As is customary every year, the Finance Minister offered some tax concession to the salaried tax payer. He raised the minimum tax exemption limit from Rs 1.8 lakh to Rs 2 lakh. This will put an additional Rs 2,060 into every tax payer’s pocket.
The bigger benefit, however, goes to the upper middle-class tax payer. The 20 per cent tax bracket has been widened from Rs 5-8 lakh earlier to Rs 5-10 lakh now. This will provide a generous windfall of Rs 20,600 to those whose net taxable income is above Rs 8 lakh. Together with the benefit from the raising of the minimum exemption limit, people who earn in excess of Rs 8 lakh will be able to save Rs 22,600 on income tax.
From the financial planning perspective, one would suggest that you should not squander this windfall. Invest it for the long term so that it goes towards meeting one of your important financial goals.
Attracting new investors into equity markets
In this budget the government launched a scheme, the Rajiv Gandhi Equity Savings Scheme, which for the first time offers a tax incentive on direct investment in the equity markets. If you are a new investor whose income is less than Rs 10 lakh, you may invest up to Rs 50,000 in equities and enjoy a tax deduction of 50 per cent. This scheme carries a lock-in of three years.
The scheme has been implemented to encourage retail participation in the equity markets. Typically, owing to volatility retail investors shy away from equities, preferring to put their money in real estate, gold and fixed-income instruments. Despite a total population of 1.17 billion, only about 20 million people have demat accounts in this country. Among those with an income of Rs 2 lakh to Rs 10 lakh, about 1.5 crore PAN card holders do not have a demat account. It is no wonder that after the announcement of this scheme, brokers are salivating at the potential new business they might get (= 1.5 crore * Rs 50,000 = Rs 75,000 crore).
The government has taken this step in order to reduce the Indian stock markets’ dependence on foreign institutional investors (FII), and replace their funds with a more stable domestic source (the lock-in will ensure stability).
In India tax benefits play a big part in the success of a financial instrument. Hence, there will be many takers for this scheme. However, one wonders how prudent it is to allow first-time equity investors to enter the markets directly. Wouldn’t it be better if this benefit is extended to investments via mutual funds where there is a trained fund manager to pick stocks on the investor’s behalf?
If you are a new investor who intends to avail of the tax benefits of this scheme, choose your stocks after doing the due diligence yourself or after getting advice from a trustworthy source.
Tax deduction on interest from savings account
The Finance Minister has also proposed a deduction of up to Rs. 10,000 on interest income from savings bank account under the newly proposed Section 80TTA. Earlier, interest income was added to your salary and taxed at the marginal income tax rate. Besides the tax saving, another benefit of this provision will be that a person whose taxable income is less than Rs 5 lakh will not have to file tax return. (A lot of people could not avail of this benefit because they received an interest income from their savings account that was taxable.)
Tempering gold lust
The Finance Minister doubled the custom duty on gold and platinum from 2 per cent to 4 per cent. This will make gold more expensive.
In recent times, high gold import (along with that of crude and other commodities) has been one of the factors that led to the widening of the current account deficit. By raising the demand for dollars, high gold imports exert downward pressure on the rupee. The finance minister hopes to reduce gold imports by making it more expensive.
The risk in this measure is that it could encourage smuggling of the yellow metal.
A more innovative way of weaning Indian investors away from gold would have been to launch inflation-protected bonds, as are available in the US (called Treasury Inflation Protected Securities or TIPS).
Reduction in STT
The securities transaction tax (STT) has been reduced by 20 per cent from 0.125 per cent to 0.1 per cent. This will lower the cost of equity transactions. However, the reduced rate can be availed only on cash delivery-based transactions. The majority of transactions in the stock markets are not delivery-based.
In pre-budget discussions with Finance Ministry officials, market players had asked for a complete abolition of STT or at least a 50 per cent reduction on all transactions.
Conceptually it is a good step as it encourages delivery-based trading and hence perhaps buy-and-hold type investments.
However, the impact of this move will get nullified by the higher service tax that brokers will charge from investors.
Impact of hike in excise duty and service tax
The government has increased the excise duty by 2 percentage points from 10 per cent to 12 per cent. This will make a host of goods more expensive (see box). It will also put more pressure on the manufacturing sector, which is already languishing under the burden of high interest rates and high input costs.
The service tax rate has also been hiked from 10 per cent to 12 per cent. Besides hiking the rate, the government has widened the list of services from which this tax will be levied by introducing a negative list. Hereafter, only the 17 services mentioned in the negative list will be exempt from service tax.
Both the hike in the excise duty and service tax will prove inflationary by making a wide range of goods and services more expensive.
Impact on rate cuts
RBI governor D Subbarao has said that high government expenditure has proved inflationary, and that he would take his cues from the budget while deciding whether to cut rates (a reduction in government expenditure would expedite rate cuts). Rate cuts, as we know, are crucial for setting off the virtuous cycle of growth revival, improved corporate earnings, and improved valuations of the equities and bonds lying in your portfolio.
Has the desired cut in government expenditure happened? No. The aggregate expenditure budgeted for next year (Rs 19,90,925 crore) is 18 per cent higher than the budgeted estimate for last year and could keep inflationary pressures alive. This could delay rate cuts or lead to a lower aggregate quantum of cuts during the year.
In view of the hike in indirect tax rates and the lack of a firm commitment from the government to reduce its expenditure, it is difficult to say unequivocally that this budget will have a net positive impact on your personal finances.
BOX
Goods that will become costlier due to hike in excise duty
-Goods that will become costlier due to hike in excise duty
-Two-wheelers, cars, commercial vehicles
-Refrigerators, air conditioners, washing machines, watches
-Soaps, cosmetics, home care items
-Cigarettes and bidis
-Packaged food items
-Pan masala and chewing tobacco
-Unbranded precious metal jewellery
-Imported luxury vehicles
-Imported bicycles and bicycle parts
-Imported digital still cameras
-Imported gold bars and coins, platinum
-Imported cut and polished coloured gemstones
-Travel, eating out at restaurants, and hotel stays