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Economy

What the Finance Minister Didn’t Say

Archiving my Yahoo Piece:

Pranab Mukherjee has presented a budget that has left everyone wondering what really happened and whether we should give it more attention than Sachin’s hundredth hundred. But after you have replayed the highlights over and over again, you might find it less heartening to see that customs and excise duty are higher, and you’re going to have to pay more to watch your cricket matches in future.

But it could have been worse. Budgets come with expectations, and in this budget, the Finance Minister has ignored way too many of them.

Expected, in this budget, were direct tax cuts — income taxes have been cut in some way or the other in the last few years. What we got was a tax hike of some sort. The government is struggling for revenue and facing high expenditure, and it has raised both excise duty and service tax to 12% (from 10%)  Also, now every service comes under the service tax regime, barring 17 areas (such as school education, government service and so on). In addition, the imposition of AMT (Alternate Minimum Tax) on proprietary businesses will increase their burden and they’ll pass it on to you. If you thought inflation was only about a rise in food prices, think again.

With Vodafone winning its tax case, the government was expected to wait till the Direct Tax Code to tax such transactions. But it has changed the clauses with retrospective effect all the way back to 1962 — not just will Vodafone be taxed, but so will any change in ownership in a foreign company whose assets are substantially located in India.

The government has just lost the UP elections and it was likely that some populist scheme was introduced in the budget. The FM has refrained, and instead, kept subsidies at less than 2% of GDP. Unfortunately, 2% of GDP means 200,000 cr., a sum so vast that it could build 19,000 km. of roads (the plan in this budget is to get to 8,800).

On a personal finance note, the FM was expected to increase the tax-deduction for home loan interest from 150,000 per year to 300,000 per year. The deduction for investing in infrastructure bonds was supposed to be increased from the Rs. 20,000 currently. The overall limit for section 80C, currently Rs. 1 lakh, would be increased, we had thought. None of these happened.

If oil prices are high, it’s hardly useful to increase taxes on oil products — especially crude oil that India produces. But there is now an increase in tax from Rs. 2,500 to Rs. 4,500 a tonne , impacting even ONGC, whose shares were sold a few days back by the government in a public auction. This is like selling you a cycle and then demanding one wheel back as tax.

The market expected import duties on Chinese power equipment, since the local producers (BHEL etc.) were finding it difficult to compete. No such levy, and BHEL’s stock ended down 4% after opening up 2%.

The markets thought Securities Transaction Tax (STT) would go away. Only delivery transactions — charged at 0.125% currently — will be charged a lower STT of 0.1%. Since the STT only really hurts those that trade a lot — intraday players and those that dabble in derivatives — the markets mourned the lack of a better announcement. However, commodities traders that expected a similar tax on their trades smiled as no such tax came about.

New investors, we were told, must be encouraged to buy mutual funds. However, the FM has provided a Rs. 50,000 deduction to the newest of the lot, if they earn less than 10 lakhs and invest directly in equity shares.

The capital gains you might make when you sell a house can now be used, without having to pay tax, to invest in a small manufacturing company which buys new machinery. Compulsory audit will now only be required if turnover exceeds Rs. 1 crore (from 60 lakhs). Small and Medium Enterprises will be pleasantly surprised.

You’ll find that LCD and LED TVs get cheaper as the panels are exempted from customs duty, as are iodised salt, soya products and probiotics. So if you choose to be a couch potato, you might as well eat healthier. And if you choose to go abroad to buy your TVs, you can bring back, duty-free, articles worth Rs. 35,000 instead of the earlier Rs. 25,000 limit. Overall, surprising in a budget speech, but how much can you go on about agricultural research institutions getting grants of Rs. 25 crore each?

Since 2011-12 was really bad, the next year should have been better for government finances. The fiscal deficit is expected to be better, coming down from a revised 5.9% to 5.1% next year. However, the internal picture shows that the actual rupee amount of the deficit is expected to be Rs. 521,980 in 2011-12; but the figure for next year is only Rs. 513, 590. Magically, we will grow our GDP 15%, grow tax and other government revenues by a magnificent 22%, while expenditure only goes up 13%. This is possible, and might involve inhaling of certain substances, but indeed unexpected.

Perhaps we missed a lot more, but this budget left a lot unsaid.