De-mystifying Budget 2013-2014

Posted in Finance Articles, Total Reads: 1858 , Published on 07 April 2013
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With the Lok Sabha elections slated for next year, this was the UPA’s last chance to appease the people of India with a populist budget embellished with freebies. But did finance minister P.Chidambram defy all odds and present a budget that did not do much to boost voter sentiments? Brief insight into budget 2013-14 is given for all those of you’ll who haven’t had the opportunity to browse through the highlights of this budget.

 

India is expected to end the current fiscal with a deficit of 5.2% of the GDP. This has been possible due to cutting down on unplanned expenditure since PC took over as FM in August, 2012. Hence, it wouldn’t be wrong to say that the finance minister has laid greater emphasis on the path to fiscal recovery than presenting a budget that appeal to the masses (by way of giving tax sops, reducing excise duty, etc. With the Indian economy under the imminent threat of a sovereign downgrade (which would have pushed the economy into further turmoil), the finance minister has tried to introduce a slew of measures aimed at reviving consumer sentiments, boost savings and increase inflows in the form of investments. Some of the key features and their implications have been listed beneath:

- Pegging the fiscal deficit for the coming year at 4.8% is optimistic. This stems from the fact that the finance minister is hopeful of :

  • Mopping up 19% more in tax revenues in the coming fiscal
  • Limiting the fuel subsidies to Rs.64000 crores (60% of gross under-recoveries by state run fuel companies) by way of de-regularization of fuel prices.
  • Meeting the divestment target of Rs.54000 crores by selling residual stake in Hindustan Zinc and Balco and minority stakes in PSU’s.
  • Revenue from the 2G (122 cancelled licenses) telecom spectrum sale.
  • Increase indirect tax collection by increasing excise duty on SUV’s (applicable to vehicles carrying 1500cc engines, over 4m in length and having a ground clearance of 170mm) from 27% to 30%. This could push SUV prices by anywhere between Rs.20000-60000. However, if reports are to be believed American bike maker Harley Davidson is planning to set up manufacturing plants in the country which might negate the effect of the hike in excise.

- Citizens with an annual income of over Rs.1 crores to pay an additional surcharge of 10% on their tax liability. (this would be existent for only one year)

- Introduction of inflation indexed bonds helping investors protect the principal and interest on their investment. The principal rises with inflation.

- First time home buyers taking a loan up to Rs.25 lakhs( property cost maximum Rs.40 lakh)  will be allowed an additional tax deduction on interest of up to Rs.1 lakh. At present, tax payers are allowed to set off interest payments up to Rs. 1.5 lakhs against their taxable income.

- Investment in Rajiv Gandhi Equity Savings Scheme extended to investors having an income of up to Rs.12 lakhs. Investors can invest up to Rs.50000 over a three year period and claim tax deduction on 50% invested amount. Novices to the stock market stand to gain by means of increased savings and thus, promote their participation in the stock market. Also, investors in the 30% tax slab can now save up to Rs.7500 in 3 years.

- Commodity transaction tax ( CTT) introduced on non-farm futures. CTT of Rs.10 per lakh or 0.01% will be imposed on sellers of non-farm commodities such as gold and silver. This can result in 30-40% decline in commodity futures volume thus, affecting the profitability of MCX ( Multi commodity exchange- the country’s largest commodity futures bourse with an 80% market share)

- Govt. of India’s borrowings to be around Rs.629000 crores against earlier expected borrowings of Rs.600000 crores. This puts additional pressure on the bond markets and hence, the government securities market has seen an increase in yields.

- Hike in dividend distribution tax (DDT) to 25% in debt mutual funds. This will have an impact on corporate dividends and those depending on dividends from debt funds. Even share buyback would become more expensive for companies.

- Investment allowance of 15% for manufacturing companies for purchase of plant and machinery in excess of Rs.100 crore.

- Commitment shown towards continuing infrastructure projects. 3000km of road projects( including industrial corridors connecting Delhi-Mumbai, Mumbai-Bengaluru and Chennai-Bengaluru)

- Enhancing the limit for tax-free bonds (floated by state-run companies in the infra space)to Rs.50000 crore. This invites more investors to invest in these infra bonds in which interest is exempted from tax (under section 80CCF).

- Women’s bank to be established with an initial capital of Rs.1000 crore and be served by women bankers. Also, the FM announced the setting up of ‘Nirbhaya’ fund (named after the Delhi gang rape victim) of Rs.1000 crore. Will these steps lead to women empowerment and a yield a safer place for women to live?? Only time will tell.

- Imposing 1% withholding tax on sale of immoveable property where value exceeds Rs.50 lakh (other than agricultural land).Impacts people who use the proceeds to purchase another property under Section 54 to save on capex.

While these have been some of the key highlights of Budget 2013 it still remains to see as to how the UPA- in its final leg of governance- manages to bring the economy back to the path of recovery in the face of an adverse global economy.

It is also up to the RBI to work in sync with the govt. to revive the flagging of economic growth. Governor D.V.Subbarao has to walk alongside the FM by lowering interest rates to take the economy to its forecast growth level of 5% this fiscal.

Whether the FM follows this up with more measures during the debate (on the budget during March-end) and at the unveiling of the finance bill and how the market and economy reacts to it , is anyone’s guess. From here onwards it’s a wait and watch game.

This article has been authored Rahul Radhakrishnan from LIBA, Chennai.


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