Budget is likely to be focus on the agriculture, infrastructure, job-intensive industries and SMEs. On the reform side we expect road map on the disinvestment & GST to be presented. FDI limits in Insurance, Airlines & defense to be increase with simplified norms in calculating FDI limit. Apart from the budget announcement, execution of the reform is another matter and historically we had below-average track record of executing reforms.
Key focus area to achieve long term economic growth
Supporting long term economic growth of 8-9% is very much focus of the new government and the key actionable items to achieve are: 1) Increase public & private investment in infrastructure to boost the economy reeling under the impact of the global financial meltdown 2) Announcement of new large size projects in Port, Road & urban infrastructure 3) Long-term agriculture policy to promote second green revolutions, expanding irrigation channels, development of supply chains to connect farmers to consumers and processing industry which Improve the agriculture productivity & rural income 4) Initiatives to improve skill levels & human resources 4) Improve governance.
“Aam Aadmi” is on the top priority
In UPA manifesto and post election, government has emphasized its focus on the inclusive growth and ‘aam aadmi’. Huge job losses in export oriented sectors and weak job scenario has led many politicians to support labour driven industries. Government to expand its populist scheme NREGS to urban area and will also increase the allocation to Sarva Siksha Abhiyan, NRHM and Bharat Nirman.
Government will widen the food subsidy to the Below Poverty Line (BPL) family by providing food grains of 25kg/family/month at Rs3/kg. Government may consider increasing tax slabs & exemption limit on individual income.
Economic Reforms will be accelerated but not in full gear
Roadmap on disinvestment through public offering will be announced as a revenue raising measure. Deregulation on fuel prices will be the complex and political issue as international crude is above $70/bbl level. Goods & Services Tax (GST) is most important reform in indirect taxation and government to present its blueprint in the budget. Increase FDI limits in few sector is on the card since UPA government’s budget in 2004-05. Given the lower commodity prices, subsidy bill will be lower compared to the previous year. Political will be required to improve the targeting of government subsidy by providing it directly in the recipients in form of cash/voucher rather than indirectly through prices. Given the lack of political will, any significant labour reforms are not expected. The government will not announce outright sale or management transfer of PSU companies due to political opposition both within and outside the UPA. Any changes to land acquisition laws are not expected as there was significant public opposition to SEZ land acquisitions.
Containing fiscal deficit will be the challenge
The President’s speech makes it clear that the government plans to focus on ‘inclusive growth’ and rural India. Given the significantly higher plan allocation and lower than budgeted revenue collection, budget deficit is expected to increase. The government may announce a roadmap to reduce fiscal deficit through a new FRBM Act. Government will announce revenue raising measures such as disinvestments and 3G auction sales. Oil and fertilizer subsidies were given through bonds which were not reflected on the government’s budget. In keeping with sound budgeting policies, the government many announce a plan to provide all future oil and fertilizer subsidies through the budget rather than through off budget bonds.
Corporate wish list!!!
There are not many realistic expectations of significant reduction in both direct and indirect taxes. However, India Inc will expect government to remove Fringe Benefit Tax (FBT) which has added tax burden and paper work. Re-introduction of investment allowances is also a demand for few sections of the corporate. Companies would like to see retention of the cuts in indirect taxes that were part of the stimulus packages. Long pending demand from the capital market is removal of Securities Transaction Tax (STT) & Commodity Transaction Tax (CTT) and reduction in dividend distribution tax from current 15%. Metal companies want an imposition of safe guard duty on steel & aluminum products. IT companies are lobbying to extend STPI benefits beyond March’2010. Oil & gas companies expect de-regulation of fuel prices and inclusion of tax holiday for natural gas production. Telecom players demand faster 3G auction and implementation of uniform licence fee. Infrastructure sector expect annuity based road projects compared to BOT projects. In the banking sector, banks expect increase in subvention on farm credit from 2% to 3% and consolidation of PSU banks.
Market Performance Pre-Post Budget
Historically market built expectation on budget and has little run up before the budget (Exhibit 11). Out of the last 18 budgets we have taken, in 12 cases we had given negative return for 30 days post budget as most of the announcement already factored in pre-budget run up. We had seen one of the fastest and sharpest rally since March’09, we don’t expect market run up post budget unless significant reforms announced.
For instance, although its published rate is Rs21,250 per night, the Taj Hotel is offering a sea-view room with breakfast for just Rs12,400. Similarly, the rack-rate for a sea-facing room in Oberoi has been revised downwards from Rs20,150 to Rs14,050 per night. Corporate houses with bulk booking contracts with specific hotels (based on assured minimum room nights per year) are able to negotiate even lower rates by threatening to take their business elsewhere. The CEO of an American MNC says that his firm has negotiated a rate of Rs7,000 per night at a five-star hotel near the Mumbai airport as against Rs12,000 per night that it charged during the boom to corporate customers as well. Five-star hotels are offering similar discounts even to their loyalty card holders. The Taj group of hotels also has a deal with Air India to offer incredible two-night packages for people travelling on free tickets through redemption of mileage points. Since the tickets are free, people are probably willing to splurge on a luxury hotel. The discounts are especially attractive at the favourite destinations of foreign tourists, who have not shown up this year due to the economic slowdown and security concerns. Corporate cost-saving measures have seen executives flying economy class and staying in budget hotels; hotels can retain these customers only by dropping rates.
According to a study by Egencia, the world’s largest travel firm, Delhi and Mumbai have seen the sharpest decline in five-star hotel room rates and business-class airfares in the Asia-Pacific region during the first quarter of 2009. Smart travellers are taking advantage of these offers. “I always wanted an experience of the Taj Hotels, but they were beyond my budget. Now that I know about the price cuts, I will use the opportunity to fulfil my dream of staying at the Taj,” says an excited Michelle Spafford, a US national who is visiting friends in Mumbai
a) Pay the TDS only electronically
b) Use a new challan form (No. 17) for paying the TDS
c) Fill in name, PAN and amount of TDS for each deductee while paying the TDS
d) Generate a Unique Transaction Number (UTN) for each TDS entry
e) Quote the UTN in the TDS certificate (Form 16/Form 16A) issued
f) Quote the UTN in the TDS returns (for which new form no. 24C was notified)
At the same time, the deductee, while filing his own return of income, was expected to quote the UTN for every item of TDS if he wanted to get credit for the TDS. This provision was made effective retrospectively i.e. w..e.f. Assessment Year 2008-09 (financial year ended 31st March, 2008 and all subsequent years).
All in all, the new rules would have certainly led to lot of problems for tax deductors as well as for deductees. Also, many tax payers were unable to file their returns of income for the year ended 31st March, 2009 even though the same were ready for filing simply because of the confusion about the generation of the UTNs.
Fortunately, now, the Government has acknowledged the plight of the tax deductors and the deductees and has, by issuing a Press Release on 30th June, decided to keep in abeyance the applicability of the new Rules which were notified on 25th March, 2009.
Therefore, now, till further notice,
a) All tax deductors can continue to deposit the TDS in the existing challan no. ITNS 281
b) All corporate tax deductors will continue to pay the TDS electronically. Similarly, Individuals and Partnership Firms will also pay the TDS electronically if they are subject to tax audit
c) All other tax deductors can continue to pay the TDS in physical mode as they have been doing uptill now.
d) The quarterly TDS statements that are required to be filed will continue to be so filed as per existing rules and no new forms are to be filed
e) The returns of income for A.Y. 2009-10 (i.e. for the year ended 31st March, 2009) can be filed without quoting the UTN (even though the form requires the assessee to fill up the same)
We hope that with this, all the confusion that has prevailed in the context of payment of TDS to the Govt. and generation of the UTNs stands cleared. If you have any doubts about the matter, please feel free to contact the undersigned.
SKP - Mumbai, India