Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

Budget 2015: More Taxes, No Wealth Tax, More Other Taxes, Black Money Attacks

Budget 2015 wasn’t quite a blockbuster budget. It’s more of a pocket buster, as the biggest thing inside it is: Taxes are up.

No Tax Rates Changed, But High Income Surcharges are Up

The Government hasn’t changed much about Direct Taxes. Slabs remain the same as last year. Your 80C limit (on savings) remains the same. Your exemption for housing loan interest remains the same.

Certain small changes are in:

  • Buying health insurance can save you Rs. 25,000 now (instead of Rs. 15,000) tax deductible. (Senior citizens get Rs. 30,000)
  • Buying Sukanya Samriddhi deposits (for a girl child) are eligible for 80C deductions. Where the interest accrued and withdrawals are not subject to tax!
  • You can buy into pension funds from insurers, or the NPS scheme for upto Rs. 150,000 a year (from Rs. 100,000).

However, if your income (or your company’s income) is greater than Rs. 1 crore, your surcharge just went up by 2%. Currently the surcharge is 10% for individuals, which will go up to 12%.

Just this little thing will bring in more than Rs. 9,000 cr. to the government coffers, it seems. Most listed companies are in this bracket, and their taxes just went up to 34.6% (30% + 12% surcharge + 3% cesses).

Corporate taxes will come down to 25% in four years, but not now; only after next year. But for that, there’s another budget next year which will have details.

Service Tax Up to 14% and Excise Duties Hiked

Service tax, previously at 12.36% will now move to 14% (and no further cesses). This is massive: the country has a significant percentage of GDP in the service sector, higher than all others. The rates of tax on services going to 14% means a higher bill to everyone. Service tax changes will apply from a future date, not yet specified.

Excise duties, which were at 12.36% (in general) will be hiked to 12.5% (and no further cesses). This will be applicable immediately.

The increases change prices of everything you use, nearly. This will result in a higher cost for services and products in India. In general, the rise in service tax will increase restaurant bills (which have a service tax component), your telephone bills (where there’s service tax on the full amount), commercial rentals and so on.

Some corporates may be able to offset input taxes with output, but not always. And for the end consumer, such taxes are just extras we have to pay, without any offset. You will see this hit you across the board next year.

Wealth Tax Removed

Wealth tax, which was applicable on certain owned assets above Rs. 30 lakh, has been abolished. This yielded  a piddly Rs. 789 cr. in the last year, which is not even big enough to qualify for a scam nowadays. So it’s been removed, thankfully. The only impact is the damage it has caused to the income of accountants who would charge to file for this additionally.

Black Money Attack, Or Something

The FM doesn’t like black  money. So he will attack it with multiple measures.

If you buy a house or a property, you can’t pay in cash. (Upto Rs. 20,000 is okay, but try finding a property worth just that) The rest has to be by cheque or through the banking system. Like this is going to change anything, because when people use cash they use it only to hide the money from the government in the first place. But of course, if they are caught, they will be dinged using this rule now.

There are two bills that will also be produced in this parliamentary session. One, that mandates disclosure of all foreign assets. If you own a bank account abroad, or a house, you have to declare it and any income from it. If you don’t, they can charge you the full tax on these assets, and if they choose to, they can sell your assets in India to realize this value.

A Benami Transactions Prohibition Bill will attack domestic black money. Particularly focussed on real estate.

What isn’t there:

  • No changes to the arbitrage funds that we thought about. So markets haven’t been hit.
  • No changes to capital gains taxes.
  • No major increases in revenues or in expenditure. The budget is kinda useless in that respect.
  • If you thought there were sops for Make In India, think again. There are sops for Make in Rural Andhra Pradesh and Telangana though.
  • In fact, there might be a “make outside India”. Customs duty for inputs have been reduced (though these may only have been “rationalized”)
  • No specific benefits for solar or wind power, other than some customs and excise exemptions for solar water heaters.
  • This “housing” impetus which was supposedly expected is not reflected in any budget scheme.

The Fiscal Situation

We’ll write in more detail. But this part is not very encouraging.

More money goes to states, with the Finance Commission recommendations. The center though has only Rs. 15,000 crore rupees more to work with, taking revenues to Rs. 11.42 lakh crore rupees.

Expense wise, they will close the tap at 17.77 lakh crore, which is around 90,000 cr. more than this year. Such a tiny increase in expenditure has probably never been seen.

Fiscal deficit goes to 5.56 lakh crores. This they say is 3.9% of the GDP. (this is higher than the 3.6% expected but they pushed some targets over)

That would peg the GDP at 142 lakh crores next year. Given that it’s 125 lakh crores this year, that means a nominal growth of 13.6%. Current nominal growth is 9%. So much about this budget is set on very high expectations.

Our view

We didn’t expect much from this budget. And our expectations have been met.

The government hasn’t given too many sops – in that, it is a decent budget. But in the process, it will pay out much more to states, and therefore have very little to spend. We will look at the budget from the perspective of government books in another post.

From an income tax standpoint the budget has more or less been a disappointment especially to those that thought there would be big announcements. The higher service tax and excise duty, and higher income tax for companies, is going to hurt the economy in the coming year through lower spending. Incomes aren’t really going up, and if costs go up, all that will happen is that spending will contract.

Overall we find that there’s little to show even with the higher taxes. The higher taxes are not being used to meet high investment needs. They are being used to do the regular expenditure. But each element of the budget has good and bad parts. More on this soon.

divider

Subscribe to Capital Mind:

To subscribe to new posts by email, once a day, delivered to your Inbox:

 

Also, do check out Capital Mind Premium, where we provide high
quality analysis on macro, fixed income and stocks. Also see our
portfolio which has given stellar returns in our year, trade by trade
as we progress. Take a 30-day trial: