Budget 2019 is here, and let’s get right down to it.
You’re going to be taxed more. If you’re like really rich, you’re going to pay 39% to 42% tax (if your income is more than Rs. 2 crore or 5 crore respectively). If you’re not really rich, you’re still going to pay more through:
- higher cost of petrol and diesel by Rs. 2 per liter
- Gold sees a higher customs duty by 12.5%
- Lots of increases in customs duty and stuff
And there’s some exemptions too. Let’s check them out.
The Rich Get Taxed Heavily
The government retained the same tax slabs. But there’s a caveat:
- If you make more than Rs. 5 crores, pay a 37% surcharge on your taxes. Whatever you pay as tax, multiply that by 1.37.
- For incomes between 2 and 5 cr. this is a surcharge of 25%.
Effective top tax rates for the person making more than Rs. 5 cr. as income is 42.74% and for a 2-5 cr. earner at 39%.
This is a little crazy and they’re up between 3% and 7%. How much will the government earn?
According to the direct tax database, as of FY17, we had about 83,800 crores of income with people making more than 5 cr. a year. That might have gone up to, say, 100,000 cr. so the incremental tax revenue is 7% of that = Rs. 7,000 cr.
The 2-5 cr. number isn’t easily available, but it should also be about Rs. 100,000 cr. or so, which means incremental revenue there is 3% higher, at Rs. 3,000 cr.
In total, the government will get a maximum benefit of Rs. 10,000 cr. which isn’t that much, really.
Corporate tax comes down to 25% for most companies
A limited company gets to pay only 25% tax if it’s turnover is less than 400 cr. in 2017-18.
So I don’t get this: If you make 5 cr. or more, you pay 42% tax. Why wouldn’t you just create a company (with your wife/parents/kids as co-directors) and have all the money in that company instead? This company can bill whoever’s paying you (, and you’ll only pay 25% tax. You’ll have to charge GST, but that’s okay because whoever’s paying you can offset that with GST they charge their customers.
(Additional bonus: you may get to offset some expenses such as travel, owning a car etc. You can pay yourself a nominal salary from this company, and stay in a lower tax bracket, and your company only pays 25% tax. I guess people prefer to pay tax, but this structure is easily doable)
Pay more for Gold, For Petrol and Diesel and For A Lot of Things
There’s now a 12.5% duty on Gold (up from 10%). There’s a Rs. 2 extra cess on Petrol and Diesel from tomorrow. There’s a lot of duty increases on things like Tiles, IP TV Cameras and steel products. This will increase prices for a while, and firm up profits for people who manufacture them locally.
The increase in petrol and diesel prices may not be huge – because it’s just about 5%, and that’s about how much the price fluctuates anyhow. However, the point is that taxes are up – we are paying more to the government now than we have in the past.
Tax Exemption on Interest Towards Electric Vehicle Loan
To promote buying of electric vehicles, a new section 80 EEB has been introduced for claiming exemption on interest paid towards Electric Vehicle loans by individuals. According to the new section, a taxpayer can claim a maximum of Rs 1.5 lakh exemption, if he/she has paid it towards interest of electric vehicle loan.
- The loan must be taken between 1st April 2019 and 31st March 2023. You have got along runway to claim this exemption for next four years.
- The taxpayer should not own any other electric vehicle. Essentially the exemption is applicable for only first electric vehicle bought.
The exemption can be applied for assessment year 2020-2021, meaning financial year 2019-20. So you can go book that electric vehicle now.
Our View:
To use the full tax exemption of 1.5 lakh on interest means, the loan should be at least of Rs 15 lakh (@ 10% interest rate) to claim the maximum benefit. Currently, there is only one domestic electric car E- Verito, which cost roughly 12-13 lakh. Right now there are not much of options for car buyers to choose to go for this 80 EEB exemption. As the scheme is till 31st March 2023, we can wait for lot many new electric vehicle launches. The car buyers might get better options.
If you come under 20% tax bracket, the tax savings under this section will be Rs 30,000 and for 30% slab it will be Rs 45,000 savings.
There are two wheeler electric vehicles like Ather or Hero Photon etc. Most of these cost below Rs 1.5 lakh. The interest you will be paying on them is not more than Rs 15,000-20,000. Given the tax benefit you should imagine that the bike now costs about Rs. 15,000-20,000 lesser, because the interest on this loan is tax exempt.
(Note: even if you have the money you should take a loan. Because the interest is exempt from tax and you can park the money in a deposit in a bank or a mutual fund and earn more on it)
Rather than giving income tax exemption on electric vehicles government could have subsidised electric vehicles by similar scale. Which would have prompted more users (non-taxpayers and lower taxpaying bracket) would have opted for electric vehicles, especially motorbikes. (Also, note that motorbikes are among the biggest pollution creators, and a lower charging cycle, so it makes sense to move them to EV)
Get a 1.5 lakh extra exemption on Interest for Affordable Housing Loans
If you have a house worth less than Rs. 45 lakh (stamp duty value) then your house is an “affordable” house, according to the income tax act.
Loans for such houses already have a Rs. 2 lakh exemption on interest paid. (There’s also subsidies for the principal paid back, but ignore that)
A new clause section 80 EEA has been put in place to allow taxpayers to claim tax exemption on Rs 1.5 lakh over and above the current exemption claimed. The total exemption works out to be Rs. 3.5 lakh.
In all the new home buyer can claim a tax exemption of Rs 3.5 lakh and Rs 1.5 lakh on interest and principal paid towards housing loan respectively.
The 80 EEA comes with few riders:
- The housing loan must be taken between 1st April 2019 – 31st March 2020.
- The cost of the house should be below Rs 45 Lakh.
- The house owner should be first time buyer as on date of sanction of loan.
Further, the builders of an affordable housing project can get 100% exemption on their profit if the house meets a certain size measure. (Less than 60 sqm in big cities, and less than 90 sqm in others)
Our View:
For a house of RS 45 lakh, maximum loan sanctioned would be Rs 36-38 lakhs. (Loan to Value should be 80% to 85%) At current interest rate of 9% for home loans, interest paid in first year would be roughly Rs 3,40,000. In this case principal and interest paid will be both exempt for first three years for a 15-year loan tenure.
It’s an incentive for new home buyers in the affordable segment. This allows them to pay less tax while servicing interest for their primary home. The incremental impact of this is minimal, though, since there was already a Rs. 200,000 exemption. It doesn’t actually benefit the home owner – he will either pay tax to the government, or pay interest to the bank. But it’s good for the home loan companies and for the builders who now can sell property saying there’s a tax exemption.
Moving to a Less Cash Economy
The government’s thrust on a less cash economy continues, even in its previous tenure it had taken steps to move to and promote digital payments. For instance opening Jan Dhan accounts, facilitating more and more people to use banking channels for carrying out their transactions.
What has the government done to promote electronic payments and thereby discourage cash transactions in today’s budget?
Firstly, to avoid cash transactions in business, TDS of 2% will be levied on withdrawals exceeding Rs 1 Cr from bank accounts in a year. This move will impact companies whose payments are mainly in cash. For instance construction companies mainly pay their daily wage workers in cash, for large projects wages may run over Rs 1 Cr. a year.
These companies will now have to change their method to making wage payments, but remember, this is a TDS (tax deducted at source) and can be claimed as pre-paid taxes when filing returns. Also, the companies could withdraw through multiple banks.
No Fees for UPI and Debit Cards etc.
Business enterprises having annual turnover of more than Rs 50 Cr HAVE TO offer digital modes of payment like – Bhim UPI & Debit cards to its customers.
In addition merchant discount rate (MDR) or any other charges will not be levied to customers or merchants for all transactions. This is very interesting. In the earlier scheme of things merchant would be charged MDR from the bank for transactions at the merchant’s establishment. The MDR would compensate the bank and payment gateway company’s like Visa and Mastercard for providing their services, and was a good fee earning mechanism.
Since the merchants will not be charged now, who will bear these charges? Service providers like Visa and Mastercard will have to be paid and how will the facilitators like Razorpay be compensated? The budget speech says the banks and RBI should pay. This will warrant a change in the business model of companies like Razorpay, or for wallet companies, we will have to see how they cope up to this new development.
These charges will be borne by the banks and RBI from the savings that will accrue to them from handling less cash as more people move to digital payments. Frankly, banks will be impacted on fees that they earn from merchants, we will have to see how this plays out and as claimed whether the savings will be enough to meet these costs.
Closing the Buyback Loophole
One of the unique aspects that is common throughout the world is double taxation of Corporate Income. Companies are first taxed on their incomes and then when its distributed among their shareholders, the Dividend received by the shareholder is further taxed as Income.
India followed a similar path for a long time. But given the fact that very few filed returns let alone pay taxes, much of the Dividend Income did not get reported and hence the taxman missed out on the opportunity. Additionally, more than half of the non-promoter ownership of the markets is held by institutions like FIIs, insurers and mutual funds, who are not taxable on their income in India.
To eliminate the same, the government shifted the burden of paying taxes on Dividends from the receiver to the payer. In other words rather than having the receiver pay taxes, the burden was shifted to the company who paid what is now known as “Dividend Distribution Tax”.
Dividend Distribution Tax was introduced in 1997 and has been controversial. While it made compliance better since companies couldn’t evade not paying the taxes, it taxed a small investor the same as the promoter though their tax brackets would be wildly different.
This was resolved in 2016 by adding a layer for Individuals who received dividend greater than 10 Lakhs a year. Rather than the amount being tax free, they now had to pay 10% on the same when they filed their Income Tax Returns.
For the promoters of cash rich companies, this was a real negative. So they used a loophole.
The loophole was that companies could buyback shares from the shareholders and the shareholders themselves wouldn’t have to pay any tax as long as the process was carried out through a stock exchange with STT paid on the shares being sold.
With Zero Long Term Gains Taxes, this was a smoother way to distribute some of the excess cash back to the shareholders without anyone having to pay anything. You effectively gave a dividend, but no tax was paid to the government. When Long Term Capital Gains tax was introduced last year, it was a slight dampener though grandfathering of the purchase price made it more palatable.
Today, the Budget by modifying 115QA of the Income-tax Act relating to tax on distributed income to shareholders. With effect from 5th July 2019, companies going through the buy-back route will need to pay 20% on the amount being spent on buyback of shares.
With this move, government has equalized tax treatment for buybacks and dividends which is actually a positive if seen from the glasses of a small investor. While dividend is seamlessly credited, buybacks required action in the form of submission of shares to the company. Those who didn’t lost out on the opportunity to be able to sell shares at a price that generally was higher than the current market price.
Of course, now the problem is that IT and cash-rich companies were indulging in buybacks to return cash to shareholders. That will no longer be easy, because of the additional burden of 20%.
It is still beneficial to large shareholders if a company buys back shares instead of paying dividends. Because large shareholders pay 30% tax (20% as DDT and then 10% as dividend tax on their own). So, a promoter with way too much stake in the company may still choose a buyback route to take out the cash.
Loopholes of any kind are bad for they lead to distortions of a kind neither evinced nor acceptable. A higher but simpler tax structure is always better than a lower but complicated tax structure which leads to confusion and litigation. Admittedly, India now joins the regime of most other nations in two things: taxing capital gains and in taxing distribution of income to shareholders.
Our View on the Budget
This budget hasn’t done very much. It’s increased taxes for the rich, but the incremental return is just 10,000 cr. at best. In fact, of all of India, the government will only see direct taxes (by individuals) go up about 40,000 cr. – or about 8%. The tax increase to 42% is a shocker, but it won’t even give the government that much money, even by their own numbers.
There’s no real focus on growth, except for some measures for NBFCs (another post on that). The overall idea is that the government will chug on regardless, and there are no fresh ideas about investments or creating room for a lot more growth. The opinion during the speech was of optimism, but the actual budget wasn’t that great.
It may be that all the government action goes outside the budget. Indirect taxes are anyhow in the purview of the GST council. Direct taxes will see a separate code, possibly from next year. Reforms and plans and schemes can be introduced at any time, and the finances can be appropriated separately. The budget is now a less relevant thing in our lives, and perhaps for the better.
