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Sunday, January 24, 2010

THE UNION BUDGET OF INDIA 2010: WHAT TO EXPECT

ON 26TH FEBRUARY, 2010, THE FINANCE MINISTER IS EXPECTED TO PRESENT THE UNION BUDGET FOR THE YEAR 2010-11. This is a crucial year not only because f from the next year Direct Tax Code is going to be introduced but present high inflation is creating havoc in food front and fiscal deficit has increased disproportionately. At the same time economic growth rate has gone up more than expected yet development for below poverty level people has stagnated. Under the above climate it would be very difficult to manage a balanced budget. The finance minister shall have to do a tight rope walking for he would surely like to stress on growth yet would like to bring down the excess ;liquidity in the economy. To bring down the inflation he would have to increase the revenue receipt yet to curb fiscal deficit he has to control unproductive expenses. During this time expenses on infrastructure and social project shall have to be maintained in high volume.
LOWERING OF TAXES MAY BE POSSIBLE:
Yet common people as well as corporate are expecting reduction in taxes. It appears the Finance minister may increase the exception limit of individual taxes from Rs1.60 lakh to Rs 3 lakh for common individual income earners , from 1.80 lakh to 4 lakh for women and from rs 2 lakh to five lakh for senior citizen. Yet taxes on perks for salary class would be re fixed on much higher level. So while younger /junior employees and senior citizen might be satisfied people on the higher bracket would be dissatisfied.
ENHANCEMENT OF GRATUITY LIMIT IS A POSSIBILITY:
One great thing might happen. The gratuity limit of salaried persons was Rs3.5 lakh for a long time. This limit may get increased in the budget to Rs10 lakh.This would be substantial benefit to most of the middle and upper level executives. The gratuity is paid by the Government and by the corporate entities to their employees at the time of retirement. This amount is generally tax free. In case gratuity limit is increased it would surely help greatly the individual employees.

CENTRAL STIMULUS MAY BE PARTIALLY WITHDRAWN:

The central stimulus/subsidies introduced last year surely would be withdrawn selectively. The stimulus package was given to oil companies so that the loss incurred by them could be contained. Oil companies were not allowed to increase the cost of their product like kerosene and diesel so that common people do not have to pay higher prices. Increase in diesel and petrol prices create multiplier effect in transportation of food product etc. perhaps in view of such situation stimulus given to oil sector may not be withdrawn > If it is withdrawn to bring down the fiscal deficit it would be done partially. However the stimulus given to engineering industry and export oriented industry may be reduced or withdrawn.

LOWERING OF CORPORATE TAX:

I think is corporate tax rate will be lowered to 30%. This is in preparation of the Direct Tax Code (DTC) prescribing a 25% rate. This is consistent with the individual rate reduced to 30% last year as well. It is also because if you see some of the macro trends it would support such a move, if you look at the fiscal stimulus you referred to last year there were three legs to it - Social sector spending, rolling back on indirect taxes which impacted positively certain industries that was the second main and the monetary policy. I think there is a consensus that the subsidy required on monetary policy let us say for housing loans may not be required so that is going to be a revenue plus.
STRESS ON INFRASTRUCTURE AND SOICAL SECTOR WOULD CONTINUE:

Infrastructure could be major driver of the budget. The easing of monetary policy to give boost to infrastructure seems to be impossible. The scope of interest rate cut to increase the investment demand is not possible.
Possibility of inflation again coming back cannot be ruled out unless controlled vigorously by both monetary and fiscal policy implementation. The higher energy cost and commodity price will again haunt the economy.
So we rule out any possibility of easy money for investment.

DISINVESTMENT WILL BE MAJOR THRUST TO REDUCE FISCAL DEFICIT:

In order to tie the fiscal deficit the government does not have any option but resort to disinvestment. We expect disinvestment by sell of securities through IPO and FPO, where government will retain majority stake of 51% in the company.
Our calculation shows listed PSU companies disinvestment could fetch the government around $89 billion. There are several jewels in the crown that are not listed like Air India, BSNL, and Coal India. Any disinvestment of minority stake in these unlisted behemoths could fetch around another $60 to $70 billion.
So total disinvestment proceed could be around $150 billion. We don’t expect all the disinvestment to take place in single year but some will go in this fiscal. We expect government could easily meet its disinvestment target as there is expected to be no hurdle through this route.
PAYMENTS TO NON RESIDENTS & INDIRECT SHARES TRANSFER WOULD BE STREAMLINED:
We have a situation where every payment which India Inc makes today to a non-resident be it on capital account, be it on revenue account, suffers are with holding tax, unless you get a certificate from the tax officer that is ridiculous. It can not sustain. So I think there will be a clarification for sure which will at least restore the status quo to say that you can rely on a professional accountant to tell you what the withholding tax rate should be. I think that is required and that will come.
The indirect transfer of shares issue could be resolved... It has created a lot of uncertainty, lot of confusion while clearing Vodafone transfer issue. A few experts expect some kind of amendment hopefully on the positive side; however that is only a hope. But it will at least tell us the situations under which the revenue will chose to tax indirect transfers.
CAPITAL GIANS TAX WOULD REMAIN UNTOUCHED:

Many financial experts are expecting in the present budget capital gain tax would be tackled effectively. According to us the finance Minister may not handle the reform of capital gain taxes or incentive on profit. He would make it a part of the Direct Tax Code which would be introduced effective April 2011. It is not necessary for reform to be included in the annual budget.

RESTUCTURING OF TAX SLABS:

We have earlier written that tax slab may be raised from Rs1.60 to 3 lakh, for women Rs 4 lakh and for senior citzen is can be Rs 5 lakh. But most important revision would be in the second and third slab. Income above the first slab is taxed at 10% till the next slab.
The second slab may be increase to Rs 10 lakh (Rs 1 million) from the current Rs 3 lakh (Rs 300,000) for the taxation at 20%.
The third slab is expected to be raised to Rs 25 lakh (Rs 2.5 million) for the 30% tax rate. This is from an existing slab of Rs 5 lakh (Rs 500,000). The highest slab is expected to occur at Rs 50 lakh (Rs 5 million). This is an increase from the current slab of Rs 10 Lakh. If such thing happens it would be provide a great deal too well-known advocate and Doctors. Now a days some of the doctors, reported to have-not paid IT, have been taken to task by IT department. With revision in slab many self occupied individual would be greatly benefited.

SELF ASSESMENT SLAB MAY BE REVISED:
The self assessment slab is currently at Rs 40 lakh (Rs 4 million) for professionals and business people. This slab may be increased to Rs 1 crore (Rs 10 million). This will help to reduce the accounting burden for the self employed and professionals.
The most important change in the budget will re affirmation of mandatory use pan card in all financial transaction. This is most welcome. But our senior citizen and single mother and widow single lady may face inconvenience at first. They should make aware of these changes by public easily understandable advertisement in provincial language.

PAN CARD WOULD BE MENDATORY:

The PAN (Personal Assessment Number) card is currently the prime card required for any financial transaction.
However, there are a number of missing links in the implementation. For example, bank deposits in different banks (private and public sector banks and cooperative banks) are not linked. This has been used (misused) by tax payers and tax evaders by having a number of accounts in different banks to avoid tax on interest.
The same is happening with mutual funds with different folio numbers to avoid getting a KYC (Know Your Client) certification.
Making a PAN card mandatory has not been enough. The accounts also need to be integrated based on the PAN card.
Good infrastructure is the only way India could achieve double digit GDP growth rate in future.
The boost in the infrastructure will be the major drivers of the market. Expert recognizes that road projects have come to stand still as they are not attracting sufficient interest from the private sector under the existing scheme.
REFORM IN AGRICULTURE SECTOR:
This time government is totally determined to bring the Indian agriculture from hibernation. We expect agriculture and allied sector to get major boost in the budget. Government keenness towards the sector could be gauged from the fact that for the first time FM invited farmers for pre-budget meet to see their need. Otherwise in earlier years it was the officers who would give suggestion to the FM about the needs of farmer. AGRICULTURE IS STATE SUBJECT PRIMARILY BUT GOVERNMENT OF INDIA MAY THIS TIME ADVICE STATE TO SELECTIVELY INTRODUCE COPORATE SECTOR TO GET INVOLVED IN AGRICULTURAL DEVELOP-MENT taking cultivators and landlords as joint partners.
Increase in subsidy to farming sector have been demanded always by farmers this may not be possible this time yet full implementation of Swami Nathan commission report can be considered. During the last year agriculture loans were waived this time central government my route the payment of subsidy to farmers.
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FOCUS ON EDUCATION AND SKILL DEVELOPMENT:
We expect government to focus on education and skill development. As this is the only area which will help India competes in the global market. Today is the era intellectual capital. We at threshold of economic superpower can never ignore the importance of education.
We expect the government to continue its focus on education and skill development that have been the highlights of the previous budget. We have following expectation from the government regarding the issue:
Allocation for National Skill Development Corporation to increase.
Increasing R&D expenditure to at least 1% of the GDP.
The weighted deduction of 150% of the expenses incurred on scientific research should be extended to all the sectors.

PRE- BUDGET MARKET MOVEMENT:
At present market is trading at 16 thousand to 17 thousand ranges. The valuation seems to be overstretched. If we look at the Asian peers the India market looks overvalued.
The run up in the market due to excitement and liquidity has brought the market into overvalued territory. Too much of euphoria and expectation has been build in the price.
We are expecting too much from the government. Government has their limitation. So when there will be any short fall in the fulfilment of the expectation market will move into downward spiral. Any increase in interest in India and USA may bring down the price in first quarter.
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POST-BUDGET MARKET MOVEMENT:
Post budget we expect market to come down to the rational level. We feel there could be correction of 20% post budget. As there could be no trigger post budget to feed the speculator.
The big bang disinvestment if got started after budget will suck liquidity from the market, which will lead to curtailment of funds available for the secondary market.

SECTOR TO BENEFIT FROM THE BUDGET:
We expect following sector to benefit from the budget:
Agriculture and allied activity
Education sector
Farm equipments
PSU

WHAT TO AVOID:
We feel investor should take extra caution while taking position in Index heavy weight and small cap sector at this juncture. Cash is always a good alternative because market always throws good opportunities. If one has cash he or she can avail the opportunity thrown.

CONCLUSION:
We expect post budget stock specific stories to rule. Market may not give return but good story on certain stock will add glitter to ones portfolio. The flow of news regarding certain company `s disinvestment will pull the interest of market participant rather than the Sensex or Nifty stock. Budget is going to usher in a new era of development. The budget is going to be a pragmatic budget which will try to bring down fiscal deficit at the same time reduce income tax burden.

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