The first full term budget of the BJP Government is rolled out. Let us try to understand –without much of the statistics – if the proposed budget harbingers Ache din for all and thus makes everyone happy.
In the article, I have first explained the key terms which will help one to understand the key announcements in the budget. Then I have analysed, the impact on the various stakeholders due to changes in the Tax structure. I have tried to include the relevant points for a layman.
Before we go deep, let me explain few terms:
1.Fiscal Deficit: Fiscal Deficit is the difference between the annual expenditure and the annual revenue of the Government.
Government expenditures can be classified under the planned expenditure (Incurred in central development schemes) and the non planned expenditure (Interest payments, defence, subsidies etc)
Government revenues can be classified under the Revenue receipts (All direct and indirect taxes, interest receipts etc.) and the Capital receipts (Dividends from PSU shares, Disinvestment of PSUs).
For a developing country like India, the expenditures will always be more than the earnings; hence fiscal deficit becomes a necessary evil.
(More Hint: Revenue receipts are analogous to the income of your household which are recurring in nature– monthly salary, annual receipts from invested amount etc. Capital receipts are the ones which are not recurring in nature, for example proceeds from the sale of property. Imagine what you will do if your expenditures are more than your income. You will borrow, right? Or you will sell your property!! That is what government also do, either through borrowing or through disinvesting its stakes in PSUs. )
2. Direct Tax: The taxes in which the direct incidence of the tax falls on the person who pays the tax. Liability to pay the tax is NOT passed on to someone else. (INCOME TAX, CORPORATION TAX, WEALTH TAX, LAND REVENUE).
3. Indirect Tax: Levied on the goods and services. Traders / Producers pay it and they pass the liability on to the end customers. (SERVICE TAX, EXCISE DUTY, SALES TAX etc)
4. GST: stands for the Goods and Services Tax. Currently, there are plethora of Indirect taxes levied on the customers at the Central and the State level. This may result in the higher price of the goods. This also leads to a disintegrated national market as the price of the same good may vary across the different regions of the country. GST proposes to be a uniform tax structure which shall prove antidote to the current irregularities in the Indirect Taxation.
Hint: Remember that GST is meant for Indirect Tax.
5. GAAR: stands for General Anti Avoidance Rules. GAAR was introduced in 2012 to target tax avoidance. It gave the nation’s Tax authorities power to scrutinise deals that have been structured to mitigate or avoid taxes. It was intended to target the tax evaders, especially the investors trying to route investments through the Tax Havens like Mauritius.
Hint: Every Individual, Investor and Company tries to minimise its tax liability. This can be achieved by legal way of Tax Planning or illegal way of Tax evasion.
6. MAT: Minimum Alternate Tax is a way to make companies pay a minimum amount of tax if they book profit. In India, in the past there were companies making profit and also distributing dividends but were not paying taxes at all, exploiting smartly the loopholes in the system. Now under the MAT regime all the companies booking profit (exceptions are there) have to pay a minimum alternate tax. Foreign companies with income sources in India are liable to pay tax under MAT also.
7. FIIs: Foreign Institutional Investors invest money in the market of the India. The money through FII route is unstable in nature, as the investors can overnight take back the money if they find greener pasture elsewhere in the world.
8. FDIs: Foreign Direct Investments is more stable in nature as the foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture.
9. Exemptions Limits on the Income Tax: Government usually exempts from Taxes the expenditure incurred in certain avenues by the citizens – for example life and health insurance, Public provident funds, Education and home loans etc. This is done to promote the good habit of savings or to promote the welfare in general.
THE BUDGET OF 2015-16: Key Highlights
PART A: Changes in Direct Tax:
- The corporate tax rate is reduced from 30% to 25%.
- The wealth tax has been abolished but the super rich (with an income above Rs. 1cr) and the firms with the income above Rs. 10 crore will pay additional 2% surcharge on the income.
Hint: Wealth Tax is charged on the net wealth of the assessee. It is a tax on the benefits derived from the ownership of the property.
- The tax slabs remain unchanged and there is no discount or holiday for the individual tax payer in that regard ( Hint: Currently, those earning below 2.5 lakh p.a. are exempted from paying the income tax , those earning between 2.5 lakh to 5 lakh p.a. falls in 10% tax bracket, those earning between 5 lakh to 10 lakh p.a. falls in 20% and those above 10 lakh in 30% tax bracket)
- The tax exemption limit has been increased in retirement schemes, health insurance and transport allowance.
- GAAR implementation has been deferred by two years
- Foreign Investors are now exempted from MAT.
Impact on the Stakeholders due to Direct Tax Changes
- On The Rich: The super rich have to shell out more money in the form of tax. The definition itself of the wealth tax gives tremendous scope for manoeuvrability. Wealth Tax has been abolished now and in place of that the super rich has to pay additional surcharge of 2% on the income. By the government estimates the additional surcharge will earn them Rs. 9000 cr.
- On The Middle Class: The middle class can save more tax by investing in the health insurance and the retirement schemes. However, the expected upper revision of the zero tax bracket limits has not been done. What it means is that those who have enough money at disposal can save more in tax by consolidating good habit of saving. For the lower bracket of the middle income group, which assumedly do not have much left as savings, there is no gain in this budget.
- On The Underprivileged: As far as the Direct Taxes are concerned, the underprivileged remains unimpacted. However, the intention to promote investment in infrastructure and the focus on more job creation should in the long run help the underprivileged. It all boils down to the implementation of the schemes for the underprivileged.
- On the Investors: Deference of GAAR by two years and exemption of the foreign investors from MAT are the steps which should make the foreign investors happy. The result should be surge in the foreign investments.
- On the corporate: Needless to say that they must be the happiest bunch after reduction in the corporate tax rates. Reduction in the corporate tax rates should enable India to compete with the other economies of the world as corporates would have extra money at their disposal to improve their efficiency. Also, a more competitive tax structure should result in more foreign investments.
PART B: Changes in The Indirect Taxes:
- Service Tax increased by 2%, from 12% to 14%
- Special Additional Duty has been exempted on most of the electronic goods.
- Imported completely build commercial vehicles will be costlier.
- Customs duty on certain inputs and raw materials has been reduced.
Impacts on Various Stakeholders due to changed in Indirect Taxes
- On the Domestic manufactures and the Make in India Campaign: A big boost will be provided to the Make in India campaign. Besides the measure to cut the custom duty on input materials (this will reduce the cost of manufacturing ) there are several other measures – like focus on improving the skills of rural youth, easy access to the credit and hike on import tariffs – which will help the domestic manufacturers .
- On the GST implementation: Finance minster has mentioned his willingness to roll out the GST by April 2016. Increase in Service Tax rate is seen as the step towards the progression of GST. GST once implemented shall be beneficial for the consumer, in the long run.
- On the Consumer: Increase in service tax means consumer has to pay more to avail the services like communications, electricity, hospitality, consultancy and financial. The burden could be quite hefty. And yes, imported mobiles, cigarettes will also become dearer due higher excise duty.
A pure economist will argue that increase in Indirect Tax always negatively impacts the middle class and the poor and the reduction in Direct Tax helps the rich more.
PART C: Some Other Points:
Impact on the Infrastructure sector: It will get a major boost as outlay on the roads and the railways has been increased. Budget announced the construction of 5 mega power projects. The budget also shows the intent towards efficient operational changes with key initiative of ‘plug and play’ model for big investment projects, a model in which projects will be offered after all the clearances are in place.
Plan to Curb the Inflation: Government and RBI will work together, in line with the international best practices, to keep inflation below 6%. A monetary policy committee will be formed with the representatives from government and RBI.
Welfare Schemes: As always, the budget has lots of schemes but the most ambitious is housing for all by 2020.
The most critical parameter – Fiscal Deficit: In the interim budget of July 14, FM promised to bring the fiscal deficit to 3% of GDP and set the target of fiscal deficit to 3.6% for the year 2015-16. He has now deferred the date of achieving the target of 3% by one year and also revised the fiscal deficit target of 2015-16 to 3.9%.
To fund the expenditures and narrow down the fiscal deficit, government will disinvest its holding in PSUs and realise 69,500 crore Rs. The FM has also announced reduction in subsidies on petroleum and fertilisers (Price of petrol and diesel have increased as a result). The budget also reduces allocation to the planned expenditure. All these three measures are aimed to control the deficit.
Part D: My final words:
- Over the short term, corporates seem to be the biggest gainers.
- The budget intends to create an investor friendly environment
- The middle class and the poor do not gain much over the short term. Reduction in subsidy will impact the middle class and the poor. Also, increase in the Service Tax can lead to the inflationary pressure. However, if all the polices and the yojnas are implemented and the good intention of the budget, including that to make stringent laws related to black money, is executed, the middle class and the poor will gain in the long run.
- Make in India campaign will get the boost due to slew of initiatives.
- Government wants people to save more and splurge less on unwanted items.
- Overall the budget is sound but to make everyone happy, execution is more important than the plan.