The Budget measures will support a short-term and a long-term rally, but the market’s medium-term prospects are clouded by global worries
After the Budget, market experts have declared that the rally today is a “technical breakout”. This makes no sense to most of us who do not know what is called technical analysis. But the plain fact is that something has hugely changed for the better. At 16,430, the Sensex has closed at its highest level over the past one month. The immediate reason for this is that huge worries about the fiscal deficit, rising borrowings, rise in excise and other taxes are gone. It is as if a huge stone has been removed from the chest of the market. It is for this reason the short term looks good. The rally will possibly take the Sensex up to 17000-17,200, after which the market will again go down.
It could well be that the market goes lower, thanks to global worries. There is talk of a double-dip recession in Europe. Continuing job losses in the US and talk of a bubble in China make the global situation pretty grim all over again. This will put pressure on the Indian markets in the medium term. However, the market cannot remain immune to a couple of features of the Budget. One, the amazingly low tax on salaried employees. Under the coming regime, right up to Rs8 lakh of taxable income, the tax is only 20%. This puts enormous amounts of money in the public.
This will boost both consumption and savings, ultimately keeping the growth going. The second is that the growth momentum of Indian businesses have been kept untouched. The Budget has been a fine balancing act between growth, cutting the fiscal deficit and increasing disposable incomes. All this will be reflected in the long term growth. Unless the external shocks cripple us again, the finance minister has just put the Indian bull on steroids.
Revised income-tax slabs to increase disposable incomes; consumers, who have been feeling the pinch of rising prices, now have something to cheer about.
Amidst all the debate about fiscal consolidation and roll-back of excise duty concessions, the finance minister has created quite a flutter in an unexpected area. The Union Budget for 2010-11 has provided individual taxpayers with some welcome revisions in tax slabs that would effectively put more money into their wallets. Consumers, who have been feeling the pinch of rising prices, now have something to cheer about.
The revised tax slabs will be as under:
Income upto Rs 1.6 lakh Nil Income above Rs 1.6 lakh and upto Rs. 5 lakh 10 per cent Income above Rs. 5 lakh and upto Rs. 8 lakh 20 per cent Income above Rs. 8 lakh 30 per cent
While the primary threshold (amount up to which no tax is payable) remains unchanged at Rs1.6 lakh, the income bracket falling under the 10% tax slab has been revised to Rs1.6 lakh-Rs5 lakh. Previously, this bracket was fixed between Rs1.6 lakh-Rs3 lakh. Similarly, the second slab of 20% tax has been fixed at Rs5 lakh-Rs8 lakh (from Rs3 lakh-Rs5 lakh earlier). The highest tax slab of 30% will now be charged on income in excess of Rs8 lakh, compared to Rs5 lakh earlier.
This dramatic shift in the direct tax policy means a savings bonanza for the inflation-hit consumer. Here is how your savings will shape up under the new tax system:
Suppose you earn an annual income of Rs4lakh, your tax incidence (excluding education cess) will now amount to Rs24,000, instead of Rs34,000 earlier—a saving of Rs10,000.
A person earning Rs6 lakh will shell out Rs54,000 in taxes. In this case, the savings compared to the earlier tax code will amount to a whopping Rs30,000.
Similarly, a person in the highest tax slab, earning say, Rs9 lakh, will be able to save a phenomenal Rs50,000 from the tax differential.
This is not the only carrot extended by the government, either. The existing tax-saving limit of Rs1 lakh has also been raised by an additional amount of Rs. 20,000 for investment in long-term infrastructure bonds.
Industry experts have welcomed the move. Ranjeet Mudholkar, principal advisor, Financial Planning Standards Board India, said, “The further slackening of income-tax slabs will benefit 60% of tax-payers. Apart from these, a tax payer can also avail deduction of Rs20,000 for investment in infrastructure bonds as notified by the Government, in addition to the limit of Rs1 lakh under Section 80C. Hence, from the perspective of financial planning, a tax-payer can channelize more funds towards their chosen financial goals despite earning the same income. Also, to optimise the use of excess disposable income, a tax-payer should employ strategic asset allocation towards better asset-creation in future.”
Nikhil Bhatia, executive director at PricewaterhouseCoopers believes this is an indication of how the slab rates will move from here onwards. “I think it is a step in the right direction. Under the direct tax code (DTC), the tax slab rates are expected to go up substantially. In that sense, it is not much of a surprise because an indication of this was coming through from the DTC itself, where the marginal tax rate has been proposed at Rs25 lakh. It is a populist move; one which will leave more money in the hands of the individual”, he said.
Dr Suresh Surana, founder, RSM Astute Consulting Group, agreed, “The finance minister has attempted to take the tax-payer on the road to the new Direct Tax Code (DTC) (proposed to become effective from 1 April 2011), by bringing the income-tax slab rates in sync with those proposed in the DTC.”
Contributions to the Central Government Health Scheme have also been allowed as deductions within the overall ceiling for tax rebate, besides contributions to health insurance schemes which are currently allowed as deductions under the Income Tax Act.
The proposals on direct taxes are estimated to result in a revenue loss of Rs26,000 crore for the government.
Income upto Rs 1.6 lakh
Income above Rs 1.6 lakh and upto Rs. 5 lakh
10 per cent
Income above Rs. 5 lakh and upto Rs. 8 lakh
20 per cent
Income above Rs. 8 lakh
30 per cent
Higher allocation and refinance, plus tax rebate on infrastructure bonds, were the key benefits for infrastructure companies in the Budget.
Infrastructure companies have welcomed the increase in allocation, but are disappointed over increase in minimum alternate tax (MAT) from 15% to 18%. However, MAT may not be a significant issue, suggests a tax expert.
“From the infrastructure point of view, the Budget is a good one, except for the increase in MAT,” said Virendra Mhaiskar, chairman and managing director, IRB Infrastructure.
“Higher MAT will be a deterrent for (setting up) special purpose vehicles (SPVs). It goes against the benefits of providing a tax holiday to SPVs. I think that the impact would be around 2% to 3%,” said Parvez Umrigar, managing director, Gammon Infrastructure Projects Ltd.
The increase in MAT holds importance to infrastructure companies as most new road projects are started under a new SPV. SPVs are the worst affected by the increase in MAT. However, tax experts believe the increase in MAT will not severely affect the sector, as the tax-holiday period has also been increased and more finance opportunities have opened up.
“With the increase in the MAT rates, cash flows will be impacted. However, the tax-holiday period has also been increased from seven years to 10 years. With the earlier seven-year tax holiday, the loss of MAT benefit for three years became a tax cost, which will no longer be the case,” said Samir Kanabar, Partner - tax regulatory services, Ernst & Young.
“Though the cashflow is affected, they have also asked India Infrastructure Finance Company Limited (IIFCL) to refinance infrastructure loans. Projects will gain more momentum with this finance. I don’t see it as a huge impact because your surcharge has come down .The effective difference would be less than 2%” said Mr Kanabar.
IIFCL’s disbursements are expected to touch Rs9,000 crore by end-March 2010 and reach around Rs20,000 crore by March 2011. IIFCL refinanced bank lending worth Rs3,000 crore to infrastructure projects during the current year and is expected to more than double that amount in 2010-11.
Deduction of an additional amount of Rs20,000 would be allowed, over and above the existing limit of Rs1 lakh for tax savings, for investment in long-term infrastructure bonds as notified by the Central Government. On the whole, the Budget is positive for infrastructure companies. “The infrastructure bonds would help in garnering money. The Rs20,000 tax benefit is welcome. It is a dedicated, separate instrument; nothing else is going to buy out the attention and this is significant,” said Mr Umrigar.
Road developers are expecting further changes in investing policies for infrastructure bonds. “Of course, our wish-list at some stage in the future would be to get the same benefit on long-term infrastructure bonds, which is now restricted to banks and NBFCs. The dedicated infrastructure developer should benefit. That is something that I would like to see gradually,” added Mr Umrigar.
On the BSE, GMR Infrastructure closed at Rs54.80, up 2.43% from the previous close of Rs53.50. Gammon Infrastructure closed at Rs24.90, up1.43%. IVRCL closed at Rs321.85, up1.12%. Nagarjuna Construction Company closed at Rs153.65, up1.82%.