Budget Analysis 2013

There was nothing exceptional in this budget. There are many announcements some of which will have a positive impact on our wallets and some that will really take out money out of our wallet, reckons Amar Pandit.

Budget by definition is an accounting exercise. However it is another thing that it’s watched so closely and given so much importance every year. This year was no different and there were high expectations from Mr. Chidambaram to deliver another dream budget. Industrialists and CEOs cheered the budget but the market seemed unhappy and gave a different picture with the Sensex down by more than 250 points. My personal view is that there was nothing exceptional in this budget but it is not something that I would worry excessively about. However, there are many announcements some of which will have a positive impact on our wallets and some that will really take out money out of our wallet.

To start with, let’s take a look at the direct tax law changes

Income tax slabs:

The only change here is that there is a tax credit of Rs. 2000 provided on incomes between Rs. 2 Lakh and Rs. 5 Lakh. Besides this, there is a surcharge of 10% on income of more than Rs. 1 Crore. Currently there are 42800 people with a declared income of more than Rs. 1 Crore. This seems to be far better than the estate taxes that many people were really worried about. It is however very ironic that only 42800 people have incomes of Rs. 1 Crore and above. This is nothing but an absolute joke as there are clearly 4 or maybe several times more this number of people with Rs. 1 Crore income and above. Some wealth studies conducted several years ago had shown the number of dollar millionaires in India to be much higher. What we really need is not HIGHER OR MORE TAXES, but widening of the tax base to include people who are evading taxes or not paying taxes at all. I have heard (stories – because they are not verified) of people living in bungalows of Rs. 25 Crores yet filing returns of Rs.5 – 10 Lakh. One ex-finance minister commented “Super Rich should not pay taxes because of the inefficiencies of the government.” * Education cess of 3% would remain same in FY 2013-14.

On the other hand, there is a SOP for service tax evaders. A new voluntary Compliance Encouragement Scheme was announced in the budget. You can file a declaration of service tax due since 1.10.2007 and make payment in one or two installments before prescribed dates. You don’t have to pay interest and penalty and other consequences will be waived.

Real Estate

I would have loved to see some solid changes here to boost real estate demand and to give a voice to end consumers of real estate. Firstly there was no mention of the Real Estate Regulator that we all have been waiting for so long. This is the need of the hour to protect consumer interests as they are being taken for a ride by most builders with severe one track agreements and so on. Secondly, there were no real SOPs to spur demand .The price of a property actually goes up significantly when you add Service Tax, MVAT to the Stamp Duty and Registration charges. Just these charges add up around 10-11% of your property cost not to mention the atrocious loading that most builders do. In this budget, the rate of abatement on service tax on homes and flats of above 2000 square feet or costing Rs. 1 crore and above has been reduced from 75% to 70%. Effectively, this translates into an increase in service tax outflow, which means that luxury housing will now become even more expensive.

There was just a boost to affordable housing with an additional interest benefit of Rs. 1 lakh on first-time home loans up to Rs. 25 lakh. However, this provision is only for the first year and with a carry-forward benefit of the unutilized deduction to the second year. According to the FM, this will help boost housing sales in tier 2 and 3 cities and peripheral areas and distant suburbs of metros, but not within the metros, where housing is more targeted towards the mid and upper income segments.

Additionally TDS of 1% is to be charged on the transfer of immovable property, which is an obvious move to curb speculation and bring about improved reporting and accountability in high-value immovable property transactions. Considering that the TDS is to be charged on the gross transaction value rather than net gains, sellers will have a cash-flow impact in situations where the sales are at a loss or at negligible gains.

While there has been some focus on affordable housing category, there seems to be absolutely nothing done on areas relating to improved transparency, real estate regulation and corporate governance.

Direct benefits to Individual Investors:

1.  Securities Transaction Tax on mutual fund and ETF redemptions, equity futures reduced to 0.01%; Commodities Transaction tax (CTT) has been introduced on non agri futures at 0.01%;

2.  There is a change in the Rajiv Gandhi Equity Saving Scheme (RGESS) which would allow income tax deduction to retail investors in stocks on investment upto INR 50,000 with 3 year lock-in. An investor would be able to claim tax exemption for 3 successive years and the income limit has been raised from Rs 10 Lakh to Rs 12 Lakh.

3.   Inflation indexed bonds and infrastructure debt funds would be introduced. Inflation indexed bonds is also seen as a move to take away some interest from gold.

4.   Union Budget 2013-14 has raised the eligibility cap on life insurance premiumsto 15% for policyholders with disabilities or specified ailments, noting that some policies meant for such individuals exceed the existing limit of 10% . If policies do not meet the eligibility criterion, the amount of deduction allowed will be restricted to 10% (15% in case of persons with disabilities) of the sum assured and the maturity proceeds will be taxed.

How will the budget affect your day to day life?

It will as mobile phones, SUV’s and eating out at restaurants will get dearer. There is a 6% duty imposed on mobile phones over Rs.2000. This means a Rs. 20000 mobile phone will be dearer by Rs.1200. Similarly prices of non-taxi SUVs and luxury cars will go up because of a hike in customs duty. There will be a rush to buy mobile phones and cars before the end of this financial year. On the recurring expenses front, cigarettes will be dearer because of an excise duty hike of 18% so will eating out at AC restaurants will be. A good news for travelers abroad is the increase in Duty Free shopping limit which is hiked to Rs. 50000 for a male passenger and Rs.100000 for a female passenger.

Debt market view point: The FM did well by targeting fiscal deficit at 4.8% of GDP in FY 2013-14. This would help to check on inflation and encourage RBI to cut interest rates going forward. The government’s borrowing plan will be watched closely but this could be yet another good year for the debt market.

Equity market view point: Though the FM has succeeded to a certain extent by not making it a populist budget and giving a desirable target of 4.8% on fiscal deficit, the overall short term impact of budget 2013 looks negative on the equity market.  However, if we indeed keep fiscal deficit in check, RBI will look at rate cuts which will augur well for the equity markets.

Needless to say, the devil is in the details and I will certainly watch out for any fine prints that I would have missed out. Finally targets and plans must be followed by excellent execution and we hope that the FM manages to JUST DO IT this time.