Budget 2012 –Not Bad!
Not Bad !! I think that about sums up the reactions to the annual light and sound show – The Budget. Given the financial constraints under which the Government was operating, the market was expecting some big taxation measures. The increase in service tax and excise duty from 10% to 12% was more or less expected and the absence of any other significant taxes provided the sigh of relief. It will soon be back to business as usual.
If the Finance Minister sticks to his words, we are soon going to see an increase in fuel prices as well. So expect a general rise in prices due to the increased excise duties and service tax. This way a quick respite from inflation is unlikely and interest rates are unlikely to drop in a hurry.
The FM announced a deduction of upto Rs. 25,000/- for investment in a yet to be notified Rajiv Gandhi Equity Savings Scheme. This is probably a case of bringing back the equity linked savings scheme (ELSS) through the back door since the DTC is slated to remove ELSS from the list of eligible deductions.
While the details of the scheme are awaited, there is a significant term “new retail investor” used in the speech which seems to point to the deduction being available to only individuals not yet investing in the equity markets, as well as the deduction being available only once in a life time. If such conditions are there in the scheme, then it is unlikely to have much of an impact.
A good announcement was setting up of the central registry for KYC requirements which should provide relief from the multiple and painful KYC process that investors have to go through every time they decide to invest in a new asset class or with a new intermediary.
The doubling of the limit for tax-free bonds makes it clear that this asset class is here to stay and will become increasingly important for the high tax paying individuals and corporate bodies.
But the biggest take away for me from the Finance Minister’s speech was the announcement of setting up of the Credit Guarantee Funds for ensuring flow of credit to consumers buying affordable homes and students for higher and vocational education. Finally, it has dawned on the government that what consumers are looking at is access to credit rather than cheap credit.
This Credit Guarantee Fund makes the affordable home buyer and the students taking education loans bankable and they may actually be perfectly willing to pay market rates for the loans. Let’s hope that these guarantee funds are capitalized adequately and are set up quickly. Moreover it is important that the process of providing guarantees to the banks/lenders is streamlined for these important sectors get a big boost.
On the Income tax front, there is a relief in terms of the re-adjustment of slabs which will lead to tax savings upto a maximum of Rs. 22,660/- for individuals earning more than Rs. 10 Lakhs. In another good move, the definition of senior citizen has been changed to 60 years (from 65 years) across most of the important purposes like higher exemption limit, higher deduction for health insurance premium, etc.
In another relief, a separate deduction for savings bank interest upto Rs. 10,000/- per year has been introduced. The interest rate on savings bank accounts have climbed to 5.50%-7% in some cases post deregulation. This deduction will improve the return for individuals for temporary liquidity kept in savings bank accounts. This will also facilitate the scheme where an individual need not file income tax returns subject to certain limits.
In a blow the finance minister has not renewed the extra deduction of of Rs. 20,000/- available for Infrastructure bonds. The exemption for the maturity proceeds of life insurance policies will now be available only if the insurance cover is at least 10 times the yearly premium.
Thankfully, the wordings seem to be clear that it will apply only to policies issued after April 1, 2012 and exemptions of existing policies till March 31, 2012 have been clearly protected. This is a step in the right direction (the DTC provides for minimum 20 times protection ) though the life insurance industry is unlikely to agree.
There is a rather convoluted clause providing exemption of capital gains arising from the sale of residential property, provided you invest the proceeds in a company that invests in plant and machinery. This is supposedly to provide a fillip to entrepreneurs who start a manufacturing unit after selling off residential property. The process seems to be quite convoluted so the impact of any such clause remains to be seen.
A sub-limit has been created for preventive health check up of Rs. 5,000/- within the existing limit for health insurance deduction.
The most regressive move is the requirement to deduct tax @ 1% from the sale consideration of high value properties (Rs. 50 lakhs in major cities) after October 1, 2012. This is clearly a move to check tax evasion rather than a tax collection tactic. This is logically not needed since the registrars are supposed to file an Annual Information Report with the tax department, giving full details of the high value transactions.
Of course, the tax department has very little control over the registrars who are state government employees and they may be either not filing these returns on time or perhaps not filing at all. For this singular failure, look at the amount of complication that the Government is subjecting property buyers to.
An individual is required to deduct and pay this tax before the property can be registered and there is no provision for refund if the deal does not go through for any reason. Thankfully, the individual is not required to get a Tax deduction account number but he will need to file quarterly statements to the tax deduction officer. But if he delays in filing this statement, he is subjected to pay the fee of Rs. 200 per day, additionally he may have to pay a penalty as well.
Now most people approach their chartered accountants to file returns after the year has ended and which is when they will discover the requirement to file statements and the fee payable will be a massive Rs. 60,000 to Rs. 70,000 plus the chances of a penalty payable. The existing provision requiring purchasers to deduct tax at source where the seller of a flat is a NRI has already resulted in purchasers avoiding buying a flat from a NRI. Instead of removing this irksome and painful process it has been tagged on for purchase from resident individuals as well.
Clearly a completely unworkable and regressive move considering the fact that the tax information network was created to free us from such process. This provision will either be dropped even before its enactment or if it is enacted, it will be meeting the fate of Banking transaction tax or the fringe benefit tax and get dropped in a years time. Hopefully it will not get enacted at all since it will damage the demand in the already dampened real estate market.