In your interest.
Online Personal Finance Magazine
No beating about the bush.
While the salaried class got a tax bonanza that will boost consumption, companies will seek to pass on the increase in excise duty or live with lower margins.
The extremely clever Budget unveiled by the FM confirms that the economy has its own momentum in spite of the government. Yes, of course, the stimulus in the form of excise cuts last year, did add a few more rupees into the pockets of the businessman. The NREGA outlay has been enhanced, to ensure rising consumerism. The Budget has been on expected lines and the FM has taken advantage of the fact that most people’s eyes were on the fiscal deficit number.
By curtailing some spending and partially rolling back the excise stimuli in the backdrop of good industrial growth, his task became easy. In fact, the buoyancy in industry has enabled the FM to surprise the small universe of taxpaying Indians to have more money in their pockets. As usual, there is a huge increase in outlays on education and healthcare (from a small base, so it seems large) which one hopes will reach the target audience.
Fiscal deficit (whilst being high) at 5.5% of GDP (due to a higher base than last year, remember) is not very low, but the markets seem to have taken to it kindly.
Non-plan expenditure, thankfully, is only up 6%. The Plan outlay has increased 13%. Of course, we never get to see what actually happens later. Typically, the capital expenditure falls short of estimate to give in to rising revenue expenditure demand. Surprisingly, some government departments show a drop in expenditure allocation (Law & Justice, Mines, Supreme Court, huge drop in Petroleum ministry outlay, etc).
The Budget is high on expectations from industry. Near 15% growth in revenues have to come from excise, and the Budget document shows a near 30% increase in customs duty revenue. The Budget banks on the momentum of economic growth rather than give any thrust to the economy.
The corporate sector does not get anything. Partial withdrawal of stimuli by raising excise duty by two percentage points and increase in MAT by three percentage points is what they have got. Demand continues to be strong and governments for years have not bothered with increasing the supply side. In this context, companies can easily pass on the increases to the buyers or at worst live with slightly lower margins. Of course, there are the usual suspects in the industry basket who seemed to have successfully lobbied overtime and got honourable mention in the Budget speech itself. A reduction of duty on ‘magnetron’, used in Microwave ovens, which may bring down the cost of a microwave by around Rs200; a 5% reduction in duty on medical equipment; a duty cut in Rhodium (a precious metal used in jewellery) and reduction of duty on watches that are imported! These kinds of actions definitely raise questions. The corporate sector appeared relived that the last year’s undeserving cut in excise duty was only partially taken away. For the corporate sector, this Budget does nothing good. Service tax remains undisturbed, waiting for convergence with GST (goods & services tax).
Imposition of MAT should impact some of the infrastructure companies marginally. However, it may not impact earnings severely. The action of putting more money in the hands of taxpayers is good for sectors like automobiles, FMCG, etc. Of course, it is likely that the lowering of income tax may result in higher savings. The introduction of the Direct Tax Code (DTC) and uniform GST now have a deadline (1 April 2011) for implementation. I hope they are not postponed further. A breather for the mutual fund industry gives them another year to continue with corporate and banks’ money.
For the markets, the Budget is a big non-event. Yes, there was a holding of breath in the run up to the Budget. But nothing unexpected has happened to disturb the market. If anything, a few more rupees are available with some stock market investors, who also pay some taxes. This Budget does not give the market any reason to move either way. What happened after the Budget was more of a relief rally. What could happen is that FII money, if it was waiting on the sidelines, anticipating a bad Budget, could come into the market and spark a short-term rally. In my view, our markets are fairly valued, with high growth expectations. No need to go through the Budget to take any investment decisions. Interest rates should stabilise since the borrowing plans of the government do not seem too extravagant.
One interesting development is the opening up of banking licences to the private sector. It would be interesting as NBFCs start to talk with small private banks for M&As (mergers and acquisitions). We could also see some of the ‘hidden’ owners of old-generation private banks breathing a sigh of relief as this will provide the opportunity to legitimise their holdings. The valuation of NBFCs (those perceived by the markets as being desirous of getting into banking) and small private-sector banks will turn volatile. Of course, this is negative news for PSU banks. More competition as well as loss of whatever talent is left, is on the cards.
A cautionary note: I have yet to read and analyse the Budget fine print.
A few years of savings at the start of your career may be all you need to be wealthy!
Recently, one of my friends and I had a heated argument on insurance. He is an insurance salesman and I am, well, an insurance atheist. He made an interesting point: while a mutual fund may deliver a higher return, he cannot force someone to save regularly through the mutual fund route because the sky does...
A mutual fund dividend payout is just taking your own money and giving it back to you
A spate of advertisements by fund houses about dividend payouts from various schemes has been enriching the print media of late. How do you use the dividends in a mutual fund at all? You have a corpus NAV, which gets reduced not only by the dividend payout but also by the amount of dividend distribution tax that is paid to the government of India. Unlike a business entity dividend, the mutual fund dividend is eyewash and is of use only to some tax avoidance or evasion entities.
It is no sign of prosperity of the mutual fund. Dividend option is good for those who seek tax-free income in the short term. In equity mutual funds, if your holding period is beyond one year, then any gain on sale of mutual fund units is tax-free to the investor. In such a case, why opt for dividend and then suffer the payout to the government of India?
The corporate sector uses the dividend option in liquid funds, because of tax arbitrage. Even with the dividend distribution taxes, they still make some extra money in the short term. For an individual also, a daily dividend scheme in a liquid fund does make some sense.
When the new Direct Taxes Code comes in, probably we would have to search for new loopholes.
However, when it comes to equity schemes, a dividend payout helps only someone who wants to indulge in ‘dividend stripping’. For this to happen, one has to be holding the units either three months before the dividend date or for nine months after the dividend payout. Let us assume that the pre-dividend net asset value (NAV) of a scheme is Rs20 and that there is a dividend of Rs4. Once the dividend is paid out, the NAV will decline to say around Rs15.12 (Rs4 for the dividend and 88 paise as the dividend distribution tax to the government). After a year, let us assume that the NAV has not moved at all. In this case, you have a ‘loss’ of Rs4.88 when you sell the units which can be offset against short-term gains. Of course, you have taken away Rs4 as dividend, which is like agriculture income, i.e., tax-free! A lot of HNIs use this route and many fund houses discreetly market the dividend payout three to four months in advance. Of course, it is illegal to announce dividend intentions so early, but who the hell cares about the law? Many schemes, if analysed, show healthy inflows around three to four months before the dividend payout.
A mutual fund dividend is taking your own money and giving it back to you. In the process, the dividend distribution tax chips away at some of your asset value. This distribution tax is not applicable if you are a non-taxable entity like a charitable organisation.
As a retail investor, stay put in the growth option. You will be better off. Whenever the fund pays a dividend, the NAV drops by the dividend payout plus the dividend distribution tax.