UNION BUDGET 2011-12: ADMIRED THOUGH LACKS SPARKLE

 The Union budget lacks flash, but is, on the total, optimistic in terms of macroeconomic impact, restructuring intent and specific sectorial focus. It pushes forward the proposed major tax reforms (the direct taxes code and the goods and services tax), brings down the fiscal deficit and overall public debt to prudent levels and jacks up infrastructure financing. It advances financial reform, with needed laws and separating public debt management from the monetary authority. It also gives specific attention to farm sector investment and marketing. Finance Minister Pranab Mukherjee's Budget lacks tax pyrotechnics, yet it reveals a remarkably improved fiscal position and a conceptual breakthrough in delivering subsidies through cash transfers for kerosene, fertilisers and cooking gas.  He has also boosted reform prospects, pledging to revive seven financial sector bills, including landmark ones to raise foreign direct investment (FDI) in insurance to 49% and lift voting rights of foreign investors in banks.

Little cuts in Tax may make Fiscal target achievable…
After posting GDP growth of 8.2% in Dec quarter 2010 it is expected to expand 8.6 percent in the current fiscal year that ends in March. Govt is expecting inflation would be around 5% for the year 2011-12. The manufacturing sector grew 5.6 percent in October-December from a year earlier, while farm output grew by an annual 8.9 percent. Gross Borrowing target for the period of 2011-12 set at Rs 4.17 trillion rupees out of which Net market borrowing seen at 3.43 trillion rupees. Govt has also estimated to reduce the fiscal deficit up to 5.1%, 4.6% and 3.5% of GDP in FY11, FY12 and FY14 respectively.

Govt's Spending increase only 13%...
For the year 2011-12 the gross tax receipts seen at 9.32 trillion rupees, Net tax to collection will be Rs 6.6 trillion rupees, Corporate tax receipts seen at 3.6 trillion rupees, Customs revenue seen at 1.52 trillion rupees, Service tax receipts seen at 820 billion rupees, Non-tax revenue seen at 1.25 trillion rupees, Factory gate duties seen at 1.64 trillion rupees and Revenue gain from indirect tax proposals seen at 113 billion rupees for the same year. Total expenditure for the year 2011-12 seen at 12.58 trillion rupees while Plan expenditure seen at 4.41 trillion rupees in 2011-12, up 18.3% from the last year. As per its on going programme of divestment in PSUs, Govt has targeted to raise 400 billion rupees for 2011-12. Govt has allocated more than 1.64 trillion rupees  to  defense  sector  in  2011-12,  520.5  billion  rupees  for  the education sector and 267.6 billion  rupees  to health sector. Govt has raised corpus for rural infrastructure development fund to 180 billion rupees in 2011-12 and will also infuse 201.5 billion rupees capital in state-run banks in during the same period.

Fuel Subsidy bill may rise on high crude price…
The subsidy bill of the Govt also seen at 1.44 trillion rupees out of which Food subsidy bill in 2011-12 seen at 605.7 billion rupees, Fertilizer subsidy bill in 2011-12 seen at 500 billion rupees, Petroleum subsidy bill in 2011-12 seen at 236.4 billion rupees. In FY12 Govt will provided 200 billion rupee cash to state-run oil retailers for selling fuel at below market rates, currently state oil retailers' bearing a revenue loss of about Rs 10/litre on diesel, about Rs 21/litre on kerosene about Rs 356 on sale of 14.2 kg cooking gas cylinder. For Agricultural sector govt has raise target of credit flow to 4.75 trillion rupees and will also give 3 percent interest subsidy to farmers in 2011-12. Agricultural dominant bank NABARD will also get the capitalisation of 30 billion rupees in a phased manner.  To augment the production of palm oil govt will provide 3 billion rupees for 60,000 hectares under palm oil plantation and government is mulling nutrient based subsidy policy for urea and cash subsidy for urea in FY12. 

Inclusion of 130 items in tax bracket will earn extra 40 billion rupees…
Govt has kept a Standard rate of excise duty held at 10% and Service Tax remained same at 10% but added 130 items under the tax net by withdrawing exemptions granted earlier will give him an extra Rs 4,000 crore. However the burden would only be of the order of 1%. Most of these relate to the consumer goods sector. For corporate MAT has been increased to 18.5% from 18% while on the other hand surcharge reduced from 7.5% to 5%. Export duty on iron export raised by 20% and branded apparel sector will also have to cough up mandatory excise duty of 10%. For individual Tax payers exemption limit raised by Rs 20,000 to Rs 1.80 lakh,  Senior citizens will get tax exemption for income up to Rs 2.5 lakh, higher from Rs 2.4 lakh and age limit of for senior citizens also reduced to 60 years from 65 years now. Apart from this Govt has also introduced new tax slab rate for very senior citizens (80 years and above) under this slab rate they will not have to pay any tax for annual income up to Rs 5 lakh.

FIIs allowed to Invest in Mutual Funds…
To give the impetus to infrastructure growth Govt will issue tax-free bonds of 300 billion rupees and also raised foreign institutional investor limit in 5-year corporate bonds for investment in infrastructure by $20 billion. Govt has also allowed FIIs to invest in equity schemes of Indian mutual funds registered with SEBI.  The move is aimed at widening the class of foreign investors in the country's equity market. To further stimulate the growth in housing sector govt has liberalized the existing scheme of interest subvention on 1% on housing loans by extending housing loan up to Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh, from the present limit of Rs 10 lakh and 20 lakh respectively. In 2011-12 Govt will also liberalized the foreign direct investment policy.  

Read more about Railway Budget 2011-12

Economy Updates Budget 2011-12

AUTO
•    Increase in excise duties by 150-200 basis points
•    Increase in duties/cess on diesel vehicles

BANKS & FINANCIALS
•    Increase in deduction from income for the amount set aside for covering bad and doubtful debts to 50 pct from 7.5 pct
•    Banks to be allowed to issue tax- rebated infra bonds
•    Raise FDI limit in insurance sector to 49 pct from 26 pct
•    Increase in limit of refinancing from  India Infrastructure Finance Company  (IIFCL) to commercial bank loans for PPP projects in critical sectors
•    Tax break on long tenor deposits

INFORMATION TECHNOLOGY
•    Extension of Software Technology Parks of India
•    Act (STPI) by at least one year

OIL & GAS
•    Reduction in customs duty on crude oil, petrol and diesel
•    Reduction in excise duties on petrol/diesel
•    Clarity on 7-year tax holiday for natural gas under Sec 80 IB
•    Flexibility on claiming the 7-year tax holiday
•    Declared goods status to natural gas
•    Abolish 5 percent customs duty on LNG
•    Exemption from service tax for exploration and production

CONSUMER GOODS/FMCG
•    Increase in cigarette excise duty
•    Increase in ad-valorem excise duty to 10 pct from 8 pct
•    Increase in minimum alternate tax (MAT) rate
•    Increase in central value added tax (CENVAT) rate and service tax to 12 pct from 10 pct

POWER
•    Extension of benefits under Section 80IA
•    More funds allocation on Accelerated Power Development and Reform Programme (APDRP) and incentives to states to reform power distribution system
•    Increase in coal cess
•    Clarity on bidding criteria and royalty amount for allocation of coal blocks.

PHARMA & HEALTHCARE
•    Increase weighted deduction on outsourced R&D to 200 pct from 150 pct
•    Extension of weighted deduction on R&D by 5 years
•    Exemption of physician samples from central excise duty
•    Exemption of customs duty for additional medical devices and life-saving drugs
•    Reduction in duty on APIs in line with formulations to 4 pct from 10 pct
•    Extension of tax incentives for hospitals with 100 plus beds to 10 years
•    infrastructure status for healthcare sector

MEDIA & ENTERTAINMENT
•    Concessions in customs duty on set-top boxes
•    Concessions in customs duty on imported plates/ink
•    Cut in DTH license fee by 4 pct to 6 pct
•    Waiver of service tax on transportation of newspapers by rail and road
•    Relaxation in FDI norms

HOTELS
•    Infrastructure status for hotels under Section 80IA

CAPITAL GOODS
•    New import duty on power equipment

CEMENT
•    Increase in excise rates to 12 pct from 10 pct
•    Elimination of import duty on thermal coal, pet coke, gypsum

REAL ESTATE
•    Extension of deadline for notifying special economic zone (SEZ) space to avail tax rebates
•    Increase in tax exemption limit for home buyers
•    Continuation of 1 pct interest subvention scheme for home buyers
•    Setting up of a real estate regulator
•    Clarity on external commercial borrowings (ECB) for sector

Expectations from the Union Budget 2011-12

Government likely to increase food subsidies
The Union Budget for the year 2011-12 is going to presented by finance minister on Monday 28 Feb 2011 and the government is likely to increase subsidies on food, a populist move that hurts public finances but promises political dividends for a ruling coalition trying to cool disquiet over high inflation. Though the govt is moving away from its partly socialised economy, removing subsidies has always been a tough call as they protect millions of poor voters who determine who governs. Its policies have led to big stockpiles of rice and wheat, but the government has often wrestled with the question of how to distribute -- free handouts defer long-term solutions and erratic monsoons and global supplies raise risk in cutting stocks.

Auto parts manufacturers eye tech boost
India's auto parts makers want the government's help to upgrade technology and spur investments to boost capacity, but analysts do not see the budget for 2011-12 to be tabled in parliament on Feb 28 taking many steps in this direction. On the contrary, the expectation is that of a modest increase in excise duty on vehicles that may push up prices. In 2010-11 thus far, component makers have witnessed an increase in sales, but going ahead rising input costs are seen weighing on margins.

Banks hope for nod to sell infra bonds in budget
Indian banks are hoping they get the government's nod to issue tax-free infrastructure bonds and some a tax concession for 2011-12. Public sector banks are also looking for the finer details of the government's capital infusion plans, which will boost capital adequacy and raise the government's stake to 58 percent in many. Currently only Industrial Finance Corp, Life Insurance Corp, Infrastructure Development Finance and some other non-banking infrastructure finance firms are allowed to issue tax-free bonds.

IT firms hope for STPI extension
Indian information technology firms are looking for increased spending on education, e-governance and defence sectors, and an extension by at least one year of tax benefits under the Software Technology Parks of India (STPI) scheme, but many think it is unlikely. STPI was a society set up by the Ministry of Information Technology in 1991 to boost software exports. Among other benefits, the STPI scheme provides a 10-year income tax exemption for units situated in software technology parks.

Government may tweak fuel taxes
India, struggling to balance between cutting its costly fuel subsidies and curbing inflation, may tweak fuel taxes in the Feb. 28 budget to cushion the blow of rising global crude prices on state-run oil retailers. Tackling the current informal structure of fuel subsidies would help investors put a better valuation on proposed share sales for Indian Oil Corp (IOC) and Oil and Natural Gas Corp, aimed at bringing in more revenues for New Delhi. Any decision on cutting subsidies would be a highly charged politically in a country where half a billion people live on little more than the cost of a litre of diesel a day.

FMCG firms want inflation tackled
India's fast moving consumer goods industry is hoping the upcoming budget will bring in concrete measures to tame spiraling inflation and viable tax structure to ensure continued growth. The 130-billion-rupee industry, which is the fourth largest sector in the Indian economy, has been reeling under the pressure of surging input costs and subsequent impact on profit margins. Prices of agri-commodities are on the rise. Prices have risen by 30-35 percent in the past two year and there is also simultaneous rise in freight rates and packaging costs which is squeezing the operating margins of the FMCG companies.

Power firms want extension of tax sops
Indian power sector expects the government to continue its thrust on infrastructure and pins its hopes on incentives for the renewable energy sector and extension of sunset clause under Income Tax Act in the budget for 2011-12 to be tabled in parliament on Feb 28. Under section 80-I(A) of the Income Tax Act mega power generation projects, with over 1,000 megawatts (MW) in case of thermal and over 500 MW in hydro, are exempted from income tax for 10 years, if they are commissioned before March 2011.

Pharma firms want tax cuts, R&D sops boost
Drugmakers want tax exemption deadline for export oriented unit (EOUs) to be extended and want infrastructure or priority sector status in the budget on Feb 28. The deadline for full exemption of tax on net profit for exports oriented units, or EOUs, ends in March, though drug-making facilities in special economic zones would not be affected. The exemption beyond March 2011 will provide relief to companies like Dishman Pharmaceuticals and Chemicals, Divi's Laboratoriess, Cipla and Torrent Pharmaceuticals, which run EOUs.

Media firms seek higher FDI, lower taxes to aid growth
Media firms are expecting the government, in its budget for 2011-12 on Feb. 28, to provide them with some tax relief and are hopeful of getting a growth boost by way of an increase in foreign direct investment limit. In June 2010, Telecom Regulatory Authority of India, which also regulates broadcasters, had recommended higher foreign direct investment in the broadcasting sector, particularly in direct-to-home (DTH) and cable network operators and FM radio.

TELECOM
    Inclusion of 3G investments under section 80IA tax benefits
    Import duty on mobile handsets

CHEMICALS and FERTILISERS
    Increase in fertilizer subsidy
    Inclusion of urea in nutrient-based subsidy (NBS) scheme and price decontrol
    Increase in excise duty on chemicals to 12 pct from 10 pct

METALS
    Remove import duty on steel
    Levy duty on hot rolled or HR coil exports
    Increase import duty on HR coils to 10 pct from 5 pct
    Increase in export duty on iron ore and fines
    Reforms on iron ore and coal blocks allocation and speedier approval process for land acquisitions

CONSTRUCTION AND INFRASTRUCTURE
    MAT break for infra projects for the initial period of income tax holiday
    Single window clearance system for road and power projects
    Easing ECB norms for infrastructure projects
     Infrastructure status to integrated townships and group housing development
    Increase in allocation for Jawaharlal Nehru National Urban Renewal Mission    

Read more about Budget 2011-12

Expectations of individual taxpayers from Budget 2011

The Union Budget is an event that is anticipated with great anxiety, fear and some hope every year. This year, given that there is an overhang of the Direct Taxes Code (DTC) and the Goods and Services tax legislation (GST), the industry expectation is that the Budget should mean relatively few changes.

 

There is, however, a lack of clarity regarding the introduction of DTC from April 1, 2012, even though a significant part of the road has been travelled. We have outlined some areas where we expect changes and new proposals that may be tabled in Parliament.

INDIVIDUAL TAXES

1. Tax Rates and Income Slab
Increase in basic exemption limit — Currently, income up to 160,000 rupees is exempt from tax for individuals. For resident women and senior citizens, the limit is 190,000 rupees and 240,000 rupees respectively. Considering the pressure from rising inflation, it is likely that the government will increase the basic exemption limits, though no change in tax rates is anticipated.

2. Deductions/ Exemptions/Tax Credits
Limit for deduction under Section 80C — Currently, a deduction of up to 100,000 rupees is allowed under Section 80C for different investments expenses incurred by individuals. It is noted that the Indian central bank is pursuing a tight monetary policy. It is therefore expected that the limit will be increased with a view to spur small savings/investment.

Medical reimbursement by the employer — Non-taxable medical reimbursement by employers is limited to 15,000 rupees per annum for an individual and their dependents. It is felt that the government may give in to longstanding complaints that the exemption amount is very low considering the substantial increase in the cost of treatment over the years. Accordingly, it is expected that this limit will be suitably revised upwards.

Deduction for interest on housing loan — Presently, a deduction of up to 150,000 rupees for interest on borrowed capital for an owner-occupied house is available only if the acquisition or construction of such a property is completed within three years from the end of the financial year in which the capital was borrowed. Most housing projects have been delayed beyond their original completion dates; in general they are taking more than three years, due to lack of funds on the part of the developers/ realty companies, which is beyond the control of the individual who has taken the loan. This condition does not apply when a property is bought to let, and therefore, to remove this disparity, it is expected that the time period of three years may be increased to five years.

Employer’s contribution to Superannuation fund — The Finance Act, 2009 imposed a tax on employees for their company’s contribution to approved superannuation funds in excess of 100,000 rupees. It is expected that in view of the current government’s desire to encourage long-term private savings, and taking into account the fact that earlier employer superannuation fund contributions were not capped, a further relaxation in the annual monetary limit may be considered.

Refund — There is considerable dissonance among the general public at the inordinate delay in the processing of tax refunds. Individuals pay tax for the current year, while simultaneously waiting for refund claims from the tax authorities for the earlier year(s). In order to provide relief to small taxpayers, it is expected that the government will come up with a proposal to release all small value refunds before the end of the financial year in which the tax return is filed.

Allowability of foreign tax credit while determining tax deduction on salary — Currently, there is no provision for reducing the estimated Foreign Tax Credit (FTC), available to employees for taxes paid in the other country while withholding taxes in India. The government may include specific provisions in the statute allowing FTC at the same time as withholding taxes from income chargeable under the heads of salary in India. Similar provisions are already there in advance tax provisions.

Read more about  Individual Taxpayers from Budget 2011