Pre Budget 2013 Expectations

The below note covers the following areas:

1. Predictions of Budget 2013
2. Expectations by Companies
3. What a Common Man wants out of the budget 2013.

A. PREDICTIONS OF BUDGET 2013:

While preparing the Budget the following points would be considered.

-          Macroeconomic issues – ie. deficits, inflation, interest rates,  savings and investment, which includes the flow of foreign funds - FII and FDI.

-          Prior to last year’s Budget 2012-13, India was battling high inflation at 9 percent, fiscal deficit at 5.9 percent of GDP and a current account deficit (CAD) at 4.2 percent of GDP. And Prior to this year’s Budget though we find that the inflation has eased, fiscal deficit at 5.3 percent of GDP and CAD at 4.6 percent of GDP does not augur well for the economy. Also, the consumer price index remains high due to food inflation

The Budget may focus on the following:

Positive Items

Unenthusiastic Items

In addition to higher fiscal deficit we also find that the value of the rupee is falling down. There by our Finance Minister (FM) may concentrate in balancing savings for individuals (allowing them to cope with inflation) with attempting to increase foreign fund flows into the country to rein in its fiscal deficit. The focus may be on laying the groundwork for channelising a greater chunk of domestic savings into the capital market. FDI in retail and civil aviation and decontrolling fuel prices may be concentrated in this Budget With pressure from rating agencies to cut down its deficit showing no signs of abating and with India’s investment grade rating in the balance, one of the priorities of Budget 2013 would be to avoid a junk rating. The Individual tax base may be increased. There may be an increase in the limit of tax deducted at source (TDS) on bank deposits. Marginal tax rates may be raised to 35-40 percent beyond the threshold. Tax incentives on various savings in financial instruments may be provided to make them more attractive for investors. The corporate bond market could also be deepened to attract foreign capital by cutting withholding tax rates. There could be sector-specific sops to encourage investment in infrastructure. Along with this, there could be an increase in limits for tax-free bonds. The capital goods sector may get some respite with an increase in import duties and higher depreciation. Budget 2013 could also elaborate more on the implementation of the Goods and Services Tax (GST), which is essential to overhaul the economy and spur GDP growth.

a.       Steps may be taken to raise government revenues from direct taxes by means of increasing the tax base. As a result more services may be brought into the tax net and also the excise duty may be increased selectively. b.       There could be an introduction of an inheritance tax. c.       Steps may be taken to curb gold imports. d.       Government Expenditure may be curbed by means of cuts in defence, railways and in other ministry budgets. Latest reports suggest he may cut the public spending target by about 10 percent. (This increased the cost of living). e.       The government may be trying to mobilize additional tax revenues.

B. (1) EXPECTATIONS FROM COMPANIES:

Auto industry hopes for excise duty cut on small cars to 10 percent from 12 percent

o        Budget may impose additional duty on diesel cars and utility vehicles

o        Roadmap expected for capital infusion into state-owned banks

o        IT services providers hope for clarity around transfer pricing norms, foreign tax credit and refund of service tax claims

o        Telecommunications companies lobby for reduction in levies and tax breaks

o        Real estate sector wants tax concessions and other fiscal benefits to builders, financiers and buyers of affordable housing

o        Retail and consumer goods companies want industry status and an independent ministry set up for retail as well as a cut in rate of service tax on commercial property rent

o        Budget may propose increase in excise duty for cement makers

o        May remove import duty on thermal coal and introduce tax-free bonds for power sector.

B. (2) OTHER EXPECTATIONS:

(i) Inverted duty structure for manufacturers of IT products. The impact of inverted duty structure is that it effectively makes direct import by end- customers or trading (i.e. import and sale) of IT products advantageous in comparison to manufacturing of IT products in India.

(ii) Nil rate of CST against Form C purchases of ITA products manufactured in India
It is recommended that sales of ITA bound products manufactured in India for subsequent sale (i.e. resale) against Form C be taxed @ 0% so that manufacturing is not placed in a disadvantageous position vis-à-vis trading/direct imports. For example, if manufacturing units are located in one State, the manufactured products attract a CST at 2% in inter-state sales, while traders/direct importers import the goods into the State of consumption and totally avoid the CST cost, thus putting domestic manufacturing at a disadvantage.

(iii) Removal of Basic Customs Duty on IT accessories. Given that such accessories such as adapters, battery, laptop carry bags, speakers form critical parts of the main IT product, imposing custom duties on the same increases the cost in the hands of the manufacturers (and disincentivises manufacturing), which impacts the pricing to end-customers.

(iv) Enhancement of MRP abatement. Considering the prevalent rates of excise duty, sales tax in addition to logistics/transportation costs and dealer margins, we recommend that this anomaly should be corrected by increasing the abatement from existing rate to 40% on IT products.

C. WHAT A COMMON MAN WANTS OUT OF THE BUDGET 2013.

TAX EXEMPTION

With rising inflation hitting pockets hard, raising the tax exemption limit to 300,000 rupees from 200,000 rupees would leave more disposable income in the hands of taxpayers, particularly those in the lower income bracket.

INVESTMENT LIMIT

The Income-Tax Act provides for a deduction of up to 100,000 rupees for certain investments/expenses such as retirement funds and insurance payments. In the absence of state-funded social security schemes, it is important for people to secure their post-retirement life. Increasing the limit to 300,000 rupees will encourage such investments. Further deductions like Section 80CCF (investing in infrastructure bonds) are also welcome as apart from encouraging savings, they also enable the government to direct the funds to priority sectors.

HOUSE LOANS:

Every Indian dreams of owning a house. But while property prices are soaring, the interest deduction of 150,000 rupees on self-occupied property is too low. The limits should be increased to 500,000 rupees.

HEALTHCARE

The rising cost of medical care is hurting the common man. Raising the exemption limits for reimbursement of medical expense to 75,000 rupees from 15,000 rupees should provide some succour. The deduction limit under section 80D for health insurance premiums should also be increased to 50,000 rupees from 15,000 rupees with more and more people opting for health insurance

ALLOWANCES

While conveyance and education expenses have surged, the exemption limits haven't kept pace. These limits should be increased in proportion to the amounts spent.

STANDARD DEDUCTION

Salaried employees incur various expenses for upgrading their skill sets. But they are not allowed deduction of any expenses incurred during employment. A standard deduction up to 30 percent of salary with an upper limit of 75,000 rupees should be provided.

ESOPs

Employee Stock Option Scheme (ESOPs) issued free of cost or at concessionary rates are taxed on the difference between fair market value and the amount actually paid by the employee. Levy of income tax on date of exercise creates a liability on the employee to pay tax on gains which are purely notional. Such taxation makes ESOPs less lucrative. Since ESOPs are a critical, motivational and retention tool for companies to retain talent, they should be taxable only on sale of shares.

REFUNDS

Revenue authorities need to ensure taxpayers get refunds and tax credit on time. This will encourage more Indians to pay tax.

SECURITIES TRANSACTION TAX:

The current Securities Transaction Tax (STT) is seen as a stumbling block for institutions as well as reluctant individual investors in the equity market and they have been demanding a reduction. This could be met to an extent to boost the investment sentiment but could be balanced with the introduction of a Commodity Transaction Tax (CTT). This could be a tool to curb excessive speculation and bring in transparency in commodity transactions.