Finance Minister P Chidambaram promised to keep his budget speech short and did it, but as in the past, a detailed reading by experts has thrown up many twists in the tale that need careful analysis
The base income-tax brackets for the assessment year (AY) 2014-15 for individuals, Hindu Undivided Families (HUF), association of persons and body of individuals have not been changed, except with respect to some minor tax rebates provided to individuals whose income does not exceed Rs5 lakh.
The Budget has sought to introduce a surcharge at the rate of 10% on such persons if their total income exceeds Rs1 crore, thereby increasing the maximum tax rate to 33.99%.
The income limit on the Rajiv Gandhi Equity Savings Scheme (RGESS) has been enhanced to Rs12 lakh from Rs10 lakh to include investment for three successive years. The impact of the enhancement may still be limited as it is restricted to only new investors.
Some pointers that need more clarification…
The finance minister has sought to incentivize household savings to be channelized into financial investments (and reduce dependence on savings in gold) and accordingly provided for certain relaxations in respect of such investors which would serve to expand the investor base. Mutual fund transactions will also benefit by the reduction in the Securities Transaction Tax (STT) which will take effect from 1 June 2013 and will apply to transactions made on or after that date.
Although the measures proposed are positive, all demands/expectations of the mutual fund industry have not been met, especially those in relation to additional tax relief and reduction in the applicable rates which if adopted might have had more positive impact on the mutual fund industry.
Transfer of ‘real’ assets at reckoner value
Earlier, as per Section 50C (Special provision for full value of consideration in certain cases) of the ITA, a provision similar to Section 43CA (special provision for full value of consideration for transfer of assets other than capital assets in certain cases) was introduced for computation of capital gains by a transferor. However, being limited only to capital assets, most real estate developers in the business of trading in real assets were outside the purview of that provision.
Extending it to all assets is likely to be a major dampener for real estate developers who may want to do an intra-group transfer or restructuring at book value.
Some pointers that need more clarification…
GAAR and distribution tax on buy-back of shares by unlisted companies
While the deferral of general anti-avoidance rules (GAAR) by two years is welcome, there is much ambiguity on its scope and application to current investment structures.
Unlisted Indian companies buying back shares will be subject to a 20% distribution tax, a cost which will ultimately be borne by the investor, but which may not be subject to treaty relief or creditable in the investor’s home country.
Withholding taxes on royalty, technical and consultancy fees paid to non-residents is proposed to be increased from 10% to 25% on a gross basis. This will directly impact FDI in joint ventures and technology transfers and the additional tax burden may be shifted to the Indian company.
Foreign institutional investors (FIIs) will be allowed to participate in exchange-traded currency derivatives, thereby improving their hedging options. Stock exchanges will be able to open a dedicated debt segment. The development of a robust debt market and boost to infrastructure debt funds is a step in the right direction. However, the structuring of foreign investment into such funds and are often hit by tax related challenges.
Some pointers that need more clarification…
To understand the implications of these provisions and more Moneylife Foundation has organised a seminar on Saturday, 2 March 2013 at The Royal Bombay Yacht Club, near Gateway of India in Mumbai. Two prominent experts, Anil D Harish, partner of DM Harish & Co and Vimal Punmiya, partner of Vimal Punmiya & Co would simplify the Budget for the audience. (Read more Budget Simplified http://www.moneylife.in/events/Budget_2013/)
While our government’s tax rates are as per developed country standards, India’s accountability for the way money is spent are as per third world standards
An average Indian travelling home by Indian Railways has to shell out money even for basics like drinking water en route and toilets at stations. In some parts of the country, an assortment of authorities now try to levy tolls and entry taxes, as soon as you disembark and move towards the exits. Searches are carried out en route on person and baggage; in the name of security is another transactional cost.
The highest transactional cost, of course, is safety of life, limb and luggage. You cannot put a cost to this, nor is data on this available. But does anybody believe things have not got worse in the last few years from an already bad reality? This is because the delivery side of the Budget has gone totally unaccountable to the very people that the collections are made from. This is to such an extent that the only way these truths can be notched up now are through the media. There is nobody else even willing to listen.
At every step, visible and often blatantly aggressive symbols of the way the power of the State are being misused. This has changed the equation for the people at the base of the pyramid—from mis-governance to oppression. A budget does not address this, other than providing lip-service, and this therefore represents yet another additional cost. An example would be the way tolls are applied on ordinary buses going into the interior areas, while government vehicles which are exempted from such payments are flagrantly misused in a way that even our colonial rulers did not dare to do.
How much would it cost the Indian Railways or the Indian Government to put up proper automated complaint booths which could record both audio and video, at every railway station and bus terminal? Or for those in governance to ensure that toilets and drinking water were made available at railway stations and bus terminals?
But no, to the vast majority of people in India, the government now increasingly appears to be nothing more than an insatiable machine, collecting taxes wherever possible, dredging the last drop of sweat from people. At the same time, the vast majority of people in India have also learnt that where constituencies get together and simply stop paying, the Indian government tends to back off—Kashmir, the Maoist areas, some parts of the North-East, for example. And most of all, the aspirational ruling classes, who also do not pay while they continue to scam, loot and scoot.
In short, while our government’s tax rates are as per developed country standards, our country’s tax spending accountabilities are as per third world banana republic standards. That is where the complete concept of a budget in India is faced with a rapidly reducing credibility year after year, and that is also why for a larger and larger number of people, the budget as presented will have no effect on the biggest tax on people—inflation. This, in rupee terms, is more than a rapid gallop now, and is likely to ride over us even faster.
It will be interesting to see how the government is going to get over the increasing tendency for commercial and other interactions to be denominated in barter or kind or cash, in many parts of the country where this is seen as a more efficient way of staying alive with dignity. And how, if at all, will they ever be able to factor this into the business of the annual budget?
(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)
The new section 80EE provides a deduction for interest paid on a home loan, spread over two income years—2013-14 and 2014-15. However, the benefit is more for individuals having annual income of above Rs6 lakh since the additional benefit can only be absorbed beyond this level
Finance minister P Chidambaram, in his Budget Speech yesterday, proposed a new section—Section80EE—which provides deduction for interest paid on a home loan, spread over two income years viz. 2013-14 and 2014-15. However, the benefit of the loans will accrue to the housing finance companies over years to come.
The tax provision for deduction of interest for housing loans is intended to be an incentive for affordable housing finance industry. However, our analysis establishes that the benefit will be absorbed only in case of higher income levels, as the benefit comes only on top of existing benefits.
India consists of a huge urban population and the numbers are increasing constantly. This has resulted in an acute shortage of housing for the urban population. According to the 2011 Census approximately 31% of the country’s population lives in urban areas. The ministry of housing and urban poverty alleviation constituted a Technical Group to address the problems associated with the segment. According to the report of the Technical Group1 approximately 19 million households face the problems of housing shortage in urban India. The report depicted the shortfall of housing for different segments of the urban population (56.18% for Economically Weaker Sections, 39.44% for Lower Income Group and 4.38 for MIG and above).
Affordable housing as defined by the Task Force constituted by the ministry of housing and poverty alleviation under the chairmanship of Arun Kumar Mishra in its Report2 is as follows:
“Individual dwelling units with a carpet area of not more than 60 sq. mt. and preferably within the price range of 5 times the annual income of the household as notified, either as a single unit or part of a building complex with multiple dwelling units”
Without getting into technicalities of the definition, typically, affordable housing finance caters to the housing needs of families with incomes of Rs20,000 per month to Rs50,000 per month. Sometimes, these mortgage loans are also referred to as micro mortgage loans.
The new tax deduction:
The new section 80EE provides a deduction for interest paid on a home loan, spread over two income years viz. 2013-14 and 2014-15.
The tax benefit is granted for payment of interest. The total amount of the deduction is Rs1 lakh, spread over two years, income year 2013-14, and 2014-15.
Is it a precondition that the assessee must have actually paid the interest? The use of the word “interest payable” in Section 80EE (1) seems to suggest that even if the assessee has not paid the instalments during the year, he will still be eligible to get the benefit.
We hope that banks/ housing finance companies will plead with the ministry of finance and have this provision amended, so as to provide benefit only for interest actually paid.
Other Sections that allow benefit for home loan borrower:
One must note that Section 80EE is not the only benefit to a person taking a home loan. There are two more provisions that need to be noted.
First is the benefit under Section 24(b) of the Income Tax Act which provides deduction from income from house property with respect to interest paid on borrowed capital. In case of a self-occupied property, since there is no income from such property, interest is allowed as deduction upto a limit of Rs1.50 lakh. This leads to a loss under the head income from house property and is allowed to be set-off during the current year against any other head of income, including salary.
The second is the benefit under Section 80C (2) (xviii) of the Income Tax Act, where a deduction is allowed for repayment of the home loan. The maximum amount of deduction is limited to Rs1 lakh.
There is a stinging nettle perhaps in the language of Section 80EE (4). This provision says that if deduction in respect of interest is claimed under section 80EE, then deduction shall not be allowed in respect of such interest either that assessment year, or in any other assessment year.
In the finance minister’s speech, there was a clear mention that the benefit under this Section is an additional benefit. The language of Section 80EE (4) does not surely reflect that intention. On the contrary, it says that if benefit has been taken under Section 80EE (4), the benefit under any other Section of the Income Tax Act, and not only for the two years in which benefit u/s 80EE is claimed, but for all the years to come. The wording of the section no way suggests that the benefit is additional.
If the language is not corrected before the passage of the law, then, in fact, instead of there being a benefit, there is a clear disadvantage in an assessee claiming Section 80EE. Section 80EE is only for two years, whereas Section 24(b) does not have any such limit. Section 80EE is limited to Rs1 lakh whereas Section 24 (b) goes upto Rs1.50 lakh.
Further, the benefit is more for individuals having annual income of above Rs6 lakh since the additional benefit can only be absorbed beyond this level.
Combining with other deductions:
Combining the impact of Section 80EE with other Sections, we find that the benefit will primarily be absorbed only by individuals having salaries of Rs50,000 per month or above. We have assumed most real life assumption—loan size of 30 times the monthly income of the individual, for a term of 15 years, and interest rate of 11% per annum.
Below, we show three illustrations that prove that at an income level of Rs40,000 per month, the benefit of the new section is NIL, at an income level of Rs50,000, the benefit is approximately Rs25,000, or 25% of what the Budget proposes to give. It is only at income level of Rs60,000 per month that the benefit reaches Rs9,0245. At an income level of Rs70,000 per month, the benefit is fully absorbed.
So, the issue is—this benefit was intended for the lower segments of the population pyramid, but in reality, that segment gets no additional benefit at all from this new tax provision.