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| March 04, 2016 |
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Impact 
It seems the NDA Government attempts to test the tolerance threshold of the masses every time it announces any bold changes in policies. Multi-social-media face-saving tactics are part and parcel of its strategy. Does this ring a bell on the land acquisition fiasco? The Government used its veto power thrice, by issuing the land ordinance, only to scrap its model in the end. Instead of taking “U” turns after receiving mass criticism, the Government should do its homework first.
On the issue of taxing Employment Provident Fund (EPF), the Government has deployed men in all directions, however, instead of ending the confusion, they seem to be creating more confusion. The “Eleven point clarification” appears pointless, as it doesn’t clarify the ambiguity. The most confusing point is the one which states: “the interest component is the taxable component”; if so, does that mean people are expected to invest only the interest component earned on 60% of their EPF in annuities? The Government needs to disseminate their logic. On the brighter side, those earning upto Rs 15,000 a month have been spared completely, without any confusion.
Employees of both public and private sectors, national and multinational companies face these unvoiced facts: If you need a house, the Government will do nothing to prick the real estate bubble. If you want to send your children to world-class schools for secondary/degree education, the Government have your children running a rat race to secure admissions in top Government aided colleges and universities. If you demand social security system to be introduced in India, the Government will draw your attention to constrained Government finances. When you speak about higher food inflation, the Government counters it with data on deficient monsoon. When you want to discuss the possibility of more tax breaks, the government makes you aware of your social responsibility, with emotional appeals to renounce your LPG subsidies voluntarily.
But in total contrast, the Government turns emotionless (and rather greedy) when it sees salary accounts loaded with savings/disposable income—oblivious of how hard you work for it and how long it took you to arrive here. Proposing to tax 60% component of your Employees Provident Fund (EPF) at the time of withdrawal (Unless you invest them in annuities, as clarified by the Government) (even due to cessation of Service), the Government has invited the public wrath. The timing to tax gullible employees, salaried people (who may be the most honest taxpayers in the country) on their retirement savings couldn’t have been worse.
Here’s why, and pinch yourself, if you find the facts unbelievable
About 9 months ago, i.e. in July the Government had made startling revelations. Mere a group of 17 individuals (INDIVIDUALS, NOT COMPANIES) owed this nation gigantic Rs 2.14 lakh crore as outstanding tax. The news was published by the Economic Times on July 30, 2015 based on Jayant Sinha’s, Minister of State for Finance, written reply at the Rajya Sabha. As on April 01, 2015, the total tax outstanding was over Rs 8.27 lakh crore.
More on timing...
As reported by DNA dated December 11, 2015 (based on PTI news), willful defaulters owe Public Sector Banks (PSBs) Rs 64,300 crore. Instead of recovering the outstanding, the FM has promised Rs 25,000 crore to recapitalize banks in this budget. Whose money is this? Whom it belongs to?
On this backdrop, when you read the proposal to tax EPF money, naturally it may rattle up the question: “what on this earth makes this Government become so insensitive to the middle class?”.
Dare to ask some tough questions...
The entire bureaucracy will race ahead to explain the nuances of the EEE vs. EET. The former stands for Exempt-Exempt-Exempt, while the latter for Exempt-Exempt-Taxed. Your investments in few long term investing avenues such as PPF, EPF get you tax deductions. The returns you generate on them are exempted from tax and when you make withdrawals they are exempt too. The Government now wants 60% of your PF withdrawals taxable.
Can the same bureaucrats (and politicians) explain the limitations they face when applying the same logic behind ‘EET’ to wealthy farmers who own hundreds of hectares of land? Are these wealthy farmers permitted to receive subsidies available to farmers in all economic classes? Don’t they enjoy the benefit of Minimum Support Price (MSP) available to their farm produces?
Our nation supports all pro-farmer initiatives, even a budget, but the Government needs to come clean about why marginal farmers don’t come out of the vicious circle of debt, ultimately leading them to end their lives. The day is not far when the middle class will start posing a similar question—“why are my simple needs unfulfilled, despite 35 long years in service/employment. To save face, the Government may then handout its 35 slogans
Google your memory
“Direct Tax should be reduced. If the Income Tax limit is raised from Rs. 2 lakhs to Rs. 5 lakhs, 3 crore people will save Rs. 24 crore which will lead to a small impact of 1 to 1.5 per cent of the National Tax Fund.”
“The savings of Rs. 24 crore in the pockets of ordinary person by reducing the ceiling on Income Tax will lead to increased purchase, which in turn will lead to increased VAT and Excise Duty, thereby increasing revenue”
No prizes for guessing who said these words…our present Finance Minister, when he was in the Opposition.
Dear reader, we deserve answers.
Urban voters love announcements and the logic that satisfies their intellectual egos. If at all Government sees some merit in rolling back its policy change; it shouldn’t stop there. It should explain what it is going to do to let the middle class exercise their rights, secure their earnings, and their dignity?
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Impact
Two persons can differ 180 degrees in their views on the same subject. Your interest affects your perspectives. The Budget is one topic on which you’ll always hear divided, contrasting opinions. The Government has to do the balancing act keeping in mind the national interest. At the time when share of agriculture in GDP has been dropping and farmers are committing suicides, providing financial impetus to the rural economy is the need of the hour.
However, the grey area is the incessant rise in indirect taxes. The Government has been forced to tax the super-rich by imposing higher taxes on specified incomes and imposing higher indirect taxes on luxury goods. In this process, a few goods and services that the middle class also aspires to have access to, will be dearer. Here are two perspectives that emerge from the debate revolving around Union Budget 2016-17.
Perspective I
Few may believe it’s unfair to endlessly charge the rich and the middle class to bail out the poor. Usually the tone of their argument is similar to this; the Government has been digging out sand from one place to heap it up in another place. The Government has been sucking more money from the pockets of the middle class and the wealthy to run the tab open for unprivileged people, and gains political mileage.
Many feel the poor remains poor because the incentives announced in their name (by slamming more taxes on others) do not actually reach them. Insidious corruption has no face but many hands. The wealthy might be concerned about their wealth, but there’s no reason to think that they are cynical and don’t feel the pain of the poor.
Perspective II
A citizen living on the bare margins of a livelihood feels there’s no problem in digging out some sand from one location to level out a bumpy road.
At the time of making announcements about providing generous support to social welfare schemes, the Finance Minister made these quick but suggestive remarks—“ Women of India have faced the curse of smoke during the process of cooking. According to experts having an open fire in the kitchen is like burning 400 cigarettes an hour. The time has come to remedy this situation.”
As expected, the Government has limited revenues to fund social welfare programmes as well as support the agriculture and infrastructure sectors. To accelerate income, the Government chose obvious options.
Those who can afford luxury, be ready to pay more.
What may look unfair is
Some duty hikes and imposition of additional cess along with service tax would make a whole host of goods and services dearer to all; without distinction between the rich and the poor.
Good and services that would cost you more are
- Cigarettes and other tobacco products (Excise duties hiked in the range of 10% to 15%
- Jewellery (Excise duty exemption on Articles of Jewellery has been withdrawn)
- Footwear (The abatement rate from retail sale price (RSP) for the purposes of RSP based assessment of excise duty, for all categories of footwear have been proposed to be revised from 25% to 30%) However providing some relief Excise duty on rubber sheets & resin rubber sheets for soles and heels has been proposed to be revised from 12.5% to 6.0%.
- Petrol cars upto 1200cc capacity and length of 4m (Infrastructure Cess of 1.0% has been introduced
- Diesel cars upto 1500cc capacity and length of 4m (Infrastructure Cess of 2.5% has been introduced)
- SUVs (4.0% infrastructure cess has been introduced)
- Soft drinks would cost more too.
- Readymade garments with MRP of Rs 1,000 or more would also become expensive.
Although the service tax rates have been kept unchanged, the new cess of 0.5% in the name of Krishi Kalyan Cess has been introduced. This will make all taxable services dearer. This includes your telephone bills and electricity bills. Hotel bills would also reflect changes in the tax structure. Mineral water now costs more. In many part of the countries where the Government is unable to provide clean drinking water, mineral water is more a necessity than luxury. To give a push to the “Make in India” campaign, duties on imported components and parts used in manufacturing electronics have been relaxed. As a result, Television sets and Mobile handsets manufactured in India may become cheaper.
PersonalFN believes in being attentive to the changes in the value of goods and services, as it affects our household budgets, eventually eroding your savings. Never underestimate the impact of small cost rises, which when put together appear substantial.
The Indian taxpayers can only hope that Government spends money collected by higher taxes wisely. Pilferage makes sound policies ineffective.
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Impact
In the pre-budget sessions, Indian equity markets were falling like a house of cards. Foreign Institutional Investors (FIIs) were the net seller in the first 2 months of 2016. As per the data obtained from NSDL, FIIs pulled out US$ 2,396 million (Rs 16,251 crore) between January 01, 2016 and February 29, 2016. High valuation of Indian companies and their relatively flat performance made FIIs apprehensive of Indian equities. To add to their worries, the Government wasn’t successful in getting progressive bills sanctioned in the parliament. Global factors weren’t supportive either.
Global negatives..
China Worries continued to spook global markets. In February, Chinese manufacturing growth dropped below the expected level. Piling inventories of crude oil and falling commodity prices further dragged global stocks. China has been the topic of high-level economic discussions happing across the world.
Presenting semiannual monetary policy report to the Congress, Federal Reserve (Fed) Chair, Janet L. Yellen said, “As is always the case, the economic outlook is uncertain. Foreign economic developments, in particular, pose risks to U.S. economic growth. Most notably, although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy. This uncertainty led to increased volatility in global financial markets and, against the background of persistent weakness abroad, exacerbated concerns about the outlook for global growth.” As a result, it is expected that the Fed may go slow on further interest rate hikes.
Budget 2016-17 was a big event
On this backdrop, fear of unknown (Union Budget 2016-17) made investors more bearish on Indian markets. Speculations reached new peaks and markets touched a new 2-year low. Some experts were expecting the Government to overshoot its fiscal deficit target while others were anticipating the reintroduction of long term capital gains tax on equity investments. The Government had a number of questions to answer which included its stance on fiscal discipline, plan for reviving the falling industrial growth and its approach to taking India to a new level of growth.
Markets breathe a sigh of relief
While the Finance Minister was announcing the Budget 2016-17 in the parliament, markets were depressed and were in the midst of panic selling. However, to everyone’s surprise markets recovered dramatically by the closing time on the very same day. There was an even bigger surprise the very next day. India’s bellwether Index S&P BSE Sensex rallied massive 777 points to record the biggest single-day rise in last 7 years. If you thought that was a knee-jerk reaction, the index shot up another 464 points for second day in a row, post budget. Third session post budget witnessed a jump of 364 points in Sensex. In short the Sensex has rallied over 1605 points (5.3%) in 3 trading sessions following the budget day.
Just a pullback or a new start?
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(Source: ACE MF, BSE, PersonalFN Research)
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Puzzled with the market reaction, investors have started wondering about the durability of the on-going rally. Although, there weren’t many industry-friendly announcements in the budget, the market seems to be rallying for some reasons overlooked by majority of the investors. We would discuss with you the reasons that might have made the markets enthused about the budget. Let’s check if this is just a pullback rally or has more legs to go farther.
To ready more about this story and PersonalFN’s views over it, please click here.
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Impact
The most awaited event -- the Union Budget 2016-17 was announced in the Parliament today. According to the budget speech, the budget was built on a transformative agenda with nine distinct pillars, namely:
- Agriculture and Farmers’ Welfare (with focus on doubling farmers’ income in five years);
- Rural Sector (with emphasis on rural employment and infrastructure);
- Social Sector including Healthcare ( to cover all under welfare and health services);
- Education, Skills and Job Creation (to make India a knowledge based and productive society);
- Infrastructure and Investment (to enhance efficiency and quality of life);
- Financial Sector Reforms (to bring transparency and stability);
- Governance and Ease of Doing Business (to enable the people to realise their full potential);
- Fiscal Discipline (prudent management of Government finances and delivery of benefits to the needy); and
- Tax Reforms (to reduce compliance burden with faith in the citizenry).
To ready more about this story and PersonalFN’s views over it, please click here.
Impact
Finance Minister Mr Arun Jaitley’s third budget was aimed at the poorer sections of society and saw focus on agriculture and farming while also providing impetus to infrastructure. Mr Jaitley decided to stick to the path of fiscal consolidation. Thus the fiscal deficit in Revised Estimate (RE) 2015-16 and Budgeted Estimate (BE) 2016-17 have been retained at 3.9% and 3.5% of GDP respectively.
The union budget 2016-17 has also proposed to amend the Companies Act, 2013 in the current budget session of the parliament with the intention to remove the impediments and increase the ease of doing business. The bill would improve the environment for start-ups and has proposed registration of new businesses to be done in one day.
The finance minister began the process of phasing out corporate exemptions while lowering the corporate tax rate for relatively small companies with a turnover of Rs 5 crore or less (in the financial year ending March 31, 2015) to 29% plus surcharge and cess from 30% plus surcharge and cess. Corporate tax rates would eventually be brought down to 25% accompanied by rationalisation and removal of various tax exemptions and incentives. Mr Jaitley also brought down the tax rate for manufacturing companies incorporated on or after March 1, 2016, giving them an option to be charge at 25% plus surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation. Phasing out the exemptions would offset the revenue loss from lowering corporate tax rates.
To ready more about this story and PersonalFN’s views over it, please click here.
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Economic Stimulus: Attempts by governments or government agencies to financially stimulate an economy. An economic stimulus is the use of monetary or fiscal policy changes to kick start a lagging or struggling economy. Governments can use tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few, to accomplish this.
(Source: Investopedia)
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Quote : "All intelligent investing is value investing — acquiring more that you are paying for. You must value the business in order to value the stock."
- Charlie Munger
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