Month: March 2015 | Page 7

3 March, 2015

Explained: Jaitley’s Rs 4.44 lakh tax benefit gimmick

Vivek Kaul

The finance minister Arun Jaitley during the course of his budget speech yesterday remarked: “After taking into account the tax concession given to middle class tax payers in my last Budget and this Budget, today an individual tax payer will get tax benefit of Rs 4,44,200.”
The details are provided in the annexure to the budget speech (which is reproduced below). Jaitley’s statement is incorrect at multiple levels. First and foremost he wants us to believe that he has been responsible for all these deductions. Secondly, what he is talking about are essentially tax deductions and not tax benefits.

What Jaitley should have said is that the total tax deductions will amount to Rs 4.44 lakh. And the tax benefit would depend on the tax bracket one falls in. So, an individual in the 10.3% tax bracket would save tax of Rs 45,752.6. An individual in the 20.6% tax bracket would save tax of Rs 91,505.2. And an individual in the 30.9% tax bracket would save tax of Rs 1,37,257.8.
Further, Jaitley’s statement suggests that he is responsible for all these tax deductions, which is not correct. All these tax deductions have been around for a while. Jaitley in his two budgets has just re-jigged the total amount of deductions that are allowed, under the various sections of the Income Tax Act.
So, in the last year’s budget he increased the deduction allowed under Section 80 C from Rs 1 lakh to Rs 1.5 lakh. He also increased the deduction allowed for interest being paid on a home loan for self occupied property from Rs 1.5 lakh to Rs 2 lakh. This year, he increased the deduction on health insurance premium from Rs 15, 000 to Rs 25,000. He also allowed an ‘extra deduction’ of Rs 50,000 for investments made into the New Pension Scheme. The transport allowance allowed as an exemption has been doubled from Rs 9,600 to Rs 19,200.
Once all this is taken into account Jaitley has essentially allowed an extra deduction of Rs 1,69,600 in his last two budgets.(Rs 50,000 extra for Section 80C + Rs 50,000 extra for investing in NPS + Rs 50,000 extra for interest paid on a home loan + Rs 10,000 extra on health insurance premium + Rs 9,600 extra on transport allowance).
Any ‘extra’ benefit is on this Rs 1,69,600. For those in the 10.3% tax bracket this works out to Rs 17,407. For those in the 20.6% tax bracket this works out to Rs 34,814. For those in the 30.9% tax bracket this works out to Rs 52,221.
Hence, the tax deductions and exemptions offered by Jaitley have led to a maximum tax benefit of Rs 52,221 and not Rs 4.44 lakh, as he claimed in his speech.

The column originally appeared on www.firstpost.com on Mar 1, 2015

(Vivek Kaul is the writer of the Easy Money trilogy. He tweets @kaul_vivek)

3 March, 2015

With Jaitley talking about 10% growth, should Rajan be cutting interest rates?

Vivek Kaul

The budget presented by finance minister Arun Jaitley on Saturday, February 28, 2015, leads me to ask—will the Reserve Bank of India(RBI) governor Raghuram Rajan cut the repo rate now? Repo rate is the rate at which the RBI lends to banks and acts as a sort of a benchmark to the interest rates at which banks carry out their lending business. Rajan had last cut the repo rate in January by 25 basis points(one basis point is one hundredth of a percentage) to 7.75%.
In the commentary that accompanied the interest rate cut, Rajan had said that the “key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation.”
What Rajan meant here was that further repo rate cuts would happen if inflation kept falling or remained where it was. At the same time he would expect the government to work towards bringing down its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
The government finances the fiscal deficit through borrowing. If the fiscal deficit goes up, the government borrowing also goes up, leading to what economists call the “crowding out” of the private sector.
The government borrowing more, leaves a lower amount of money for others to borrow and in turn pushes up interest rates. Further, increased government expenditure is also likely to lead to higher inflation, with more money chasing the same number of goods and services. In fact, the recent era of double digit inflation that prevailed in the country was primarily because of the Indian government increasing its spending. Given this, it is very important that the RBI governor keep a watch on the fiscal deficit number.
When Jaitley had presented his first budget in July 2014 he had said: “My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” Hence, the impression he had given in July and in the months that followed was that the government would work towards bringing down fiscal deficit in the years to come.
But in the budget speech that he made on Saturday, Jaitley abandoned this promise. As he said during the course of the speech: “I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously. Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.”
In absolute terms, the fiscal deficit that Jaitley is targeting is Rs 5,55,649 crore, against the Rs 5,12,628 crore, during this financial year. The question how is that will Rajan cut interest rates now, given that Jaitley has postponed the fiscal consolidation plans. The first bi-monthly monetary policy statement for fiscal year 2015-16 is scheduled on April 7, 2015.
The Economic Survey presented a day before the budget on February 27, 2015, forecasts that the economic growth during 2015-2016 (period between April 1, 2015 and March 31, 2016) will be between 8.1-8.5%.
The survey lists a number of reasons to back this forecast: “In the short run, growth will receive a boost from lower oil prices, from likely monetary policy easing facilitated by lower inflation and lower inflationary expectations, and forecasts of a normal monsoon.”
As I have written a few times by now the ministry of statistics and programme implementation recently revised the way in which the gross domestic product is calculated. This revised method led to the economic growth for 2013-2014 being revised to 6.9% against the earlier 5%. In fact, using the new model the growth projected for 2014-2015 is at 7.4%.
The high frequency data that keeps coming out suggests otherwise. For the period October to December 2014, corporate profits on a whole fell. Car sales which are an excellent economic indicator remain muted and are only expected to go up by 3-5% during this financial year. Lending by banks is much slower than it has been over the past few years. Exports during the course of this financial year have gone up by only 2.44% to $258.72 billion. The indirect tax collections have risen by 7.4% during this financial year. When the budget was presented in July 2014, it was expected that indirect taxes would grow by 20.3%.
Other data appearing in the Economic Survey all suggest that all is not well with the Indian economy. “The stock of stalled projects at the end of December 2014 stood at Rs 8.8 lakh crore or 7 per cent of GDP,” as per the Economic Survey. While the rate of stalled projects has come down a little, it still remains very high.
Further, data in the Economic Survey shows that household savings (both physical and financial) have collapsed from 25.2% of the GDP in 2009-2010 to 17.8% of the GDP in 2013-2014. This is a huge collapse.
Household financial savings have fallen from 12% of the GDP to 7.2% of the GDP. High inflation that prevailed over the last few years is a major reason for the same. Inflation has been brought under control only very recently. What this means is that the Indian consumer might decide to rebuild his savings over the next couple of years instead of getting his shopping bags out. This means that the consumer spending may not pick up, as it is expected to. And if consumers go slow on spending, it doesn’t help businesses as well as the overall economy.
Nevertheless, it seems that the finance minister has bought in to these new growth forecasts. As he said during the course of his speech: “Based on the new series, real GDP growth is expected to accelerate to 7.4%, making India the fastest growing large economy in the world…We have turned around the economy dramatically, restoring macro-economic stability and creating the conditions for sustainable poverty elimination, job creation and durable double-digit economic growth. Domestic and international investors are seeing us with renewed interest and hope.”
Given the fact Jaitley is now talking about 10% economic growth, should Rajan really be cutting the repo rate? Now that’s something worth thinking about.

The column originally appeared on The Daily Reckoning on Mar 2, 2015

3 March, 2015

Stimulus and reforms don’t go together: Jaitley should have kept his fiscal deficit promise

Vivek Kaul

Promises are meant to be broken, especially in politics. In the budget speech he made in July 2014, the finance minister Arun Jaitley had said: “My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent for 2015-16 and 3 per cent for 2016-17.” Fiscal deficit is the difference between what a government earns and what it spends. A little over seven months later he has gone back on his earlier promise. In the budget presented on February 28, 2015, Jaitley said: “I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously. Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.” The extra space that this creates will allow the government to incur an extra capital expenditure of Rs 70,000 crore during the next financial year. The thing is that just ramping up spending is not enough. At the end of the day what matters is not the quantity of spending but the quality. As Taimur Baig and Kaushik Das of Deutsche Bank Research had pointed out in a recent research report: “Recent budgets have routinely allocated close to 5% of GDP in capital spending, a non-trivial amount by any measure. But these generous allocations have not materialized in a discernible pick up in the investment cycle…If the authorities aim at high quality, high multiplier projects worth 4-5% of GDP as opposed to simply ramping up the rate of spending, they will handily achieve the goal of providing a boost to the economy, in our view.” This postponement of the fiscal consolidation by a year comes at a time when the Bhartiya Janata Party(BJP) has a majority in the Lok Sabha. The National Democratic Alliance(NDA) which the BJP heads, has close to 60% members in the Lok Sabha. The BJP has more than 50% members in the Lok Sabha. Given this, Jaitley and the BJP do not have to pander to the idiosyncrasies of multiple allies like the Congress led United Progressive Alliance(UPA) had to, before them. This is the first time India has had a single party stable government in the last quarter century. Over the years, one item that has wrecked the government finances is the subsidy on oil. Jaitley has been very lucky on that front since taking over. The price of the Indian basket of crude oil on May 26, 2014, the day the Modi government was sworn in, was $ 108.05 per barrel. It had fallen by around 60% to $43.36 per barrel by January 14, 2015. The oil price has risen since then. On February 26, 2015, the price of the Indian basket of crude stood at $59.19 per barrel. While prices have gone up over the last six weeks, they still are very low in comparison to where they were in May 2014, when the Modi government came to power. So, there is not much pressure on government finances when it comes to offering oil subsidies. Further, the government has used this opportunity to increas-e excise duty on petrol and diesel and garner revenue in the process. In fact, the finance minister has budgeted just Rs 30,000 crore for oil subsidies in 2015-2016, against the Rs 60,270 crore that will spent during this financial year. The consumer price inflation has also been brought under control by the Reserve Bank of India(RBI) and in January 2015 was at 5.1%. In fact, this is under the 6% inflation that the RBI will now have to work towards maintaining. As Jaitley said in his speech: “We have concluded a Monetary Policy Framework Agreement with the RBI, as I had promised in my Budget Speech for 2014-15. This Framework clearly states the objective of keeping inflation below 6%.” So, things are looking well on this front as well. The one big ticket item that Jaitley had to deal with were the recommendations of the 14th Finance Commission which increased the states’ share of central taxes from 32% to 42%. Jaitley chose not deal with another big ticket item in this budget. The public sector banks need a huge amount of capital in the years to come. The PJ Nayak committee report released in May 2014, estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The report further points out that “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.” In the next financial year’s budget Jaitley has committed just Rs 7,940 crore towards this. So, he has more or less given this a complete miss. Also, as Jaitley said in his speech: “uncertainties that implementation of GST will create; and the likely burden from the report of the 7th Pay Commission.” This will only make things more difficult when it comes to controlling the fiscal deficit in the years to come. Long story short—controlling the fiscal deficit this year and ensuring that it was at 3.6% of GDP and not 3.9% of GDP was important. Also as Ruchir Sharma of Morgan Stanley pointed out in a recent column in The Times of India: “When the state spends in haste, it will repent at leisure…A stimulus mindset is the opposite of a tough reform mindset, and governments can rarely do both as the contrasting experience of the 1990s showed. By the end of that decade, most emerging nations had no money to burn, no lenders they could turn to.” So, stimulus and reforms don’t go together. Let’s see if Jaitley and the Modi government are able to prove that wrong. Only time will tell. But with 282 members in the Lok Sabha, Jaitley should have kept his promise to bring down the fiscal deficit on 28/2.

The column originally appeared on www.firstpost.com on Mar 2, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

3 March, 2015

Of budget, black money and housing

Vivek Kaul

Arun Jaitley’s second budget as finance minister was slightly high on the policy front. One of the things that Jaitley talked about was tackling the black money menace in the country. This was the first time anyone from the Modi government has talked comprehensively about the black money within the country. Before this, the entire focus was on getting back the black money which has left the shores of the country. Focusing on black money in the country makes more sense simply because it would be easier to recover.
Jaitley announced a spate of measures in the budget to curb domestic black money (though he announced many more to curb black money leaving the country). He said: “a new and more comprehensive Benami Transactions (Prohibition) Bill will be introduced in the current session of the Parliament…This law will enable confiscation of benami property and provide for prosecution, thus blocking a major avenue for generation and holding of black money in the form of benami property, especially in real estate.”
The finance minister also said that the Income Tax Act would amended to “prohibit acceptance or payment of an advance of Rs 20,000 or more in cash for purchase of immovable property.” How will this provision be implemented remains to be seen.
Further, quoting of the permanent account number(PAN) has been made mandatory for purchase or sale exceeding the value of Rs 1 lakh. This is a good move. In fact, it would have been an even better move if Aadhar cards were made compulsory for real estate transactions, given that it is a tad easier to fudge the PAN card in comparison to the Aadhar card.
The ministry of finance now also plans to use technology to improve tax enforcement. As Jaitley said: “To improve enforcement, Central Board of Direct Taxes(CBDT) and Central Board of Excise and Customs(CBEC) will leverage technology and have access to information in each other’s database.”
The move to leverage technology is very interesting. In the February 2013 budget speech, the then finance minister P Chidambaram had estimated that India had only 42,800 people with a taxable income of Rs 1 crore or more. Contrast this with the fact that more than 30,000 luxury cars are sold in India every year. Both Audi and Mercedes sold more than 10,000 cars in India in 2014.
What this clearly tells us is that a lot of Indians are not paying their taxes properly. And technology can help in narrowing down who these people are.
Income on which taxes are not paid ends up as black money. A lot of black money that is generated finds it’s way into real estate in benami form. This is the major reason why real estate prices do not fall, despite sales having come to a standstill for a while now.
Further, once black money enters real estate it tends to generate more black money. Consider this—an individual buys a house for Rs 50 lakh, of which he pays 30% or Rs 15 lakh in black. The proportion could be higher or lower depending on which part of the country the individual is in. The black money portion tends to be on the higher side in the national capital territory. The same cannot be said about cities like Bangalore.
Getting back to the example. Let’s say a few years later the price has gone up to Rs 1 crore. The individual now sells the home and gets Rs 30 lakh in black, which is 100% more than what he started with. This amount then finds its way back again into real estate.
This phenomenon has led to a situation where a huge portion of the homes being built are just being built so that investors can hide their black money. This essentially ensures that those who want to buy homes to live in simply can’t afford them. As the latest Economic Survey points out: “The widening gap between demand and supply of housing units and affordable housing finance solutions is a major policy concern for India. At present urban housing shortage is 18.8 million units of which 95.6 per cent is in economically weaker sections (EWS) / low income group (LIG) segments and requires huge financial investment to overcome.” The housing shortage in rural India stands at 43.1 million homes.
A recent report by Liases Foras, a real estate research and rating company, put the weighted average price of a flat in Mumbai at Rs 1.32 crore. For the National Capital Territory the price was around Rs 75 lakh. Even in a smaller metro like Pune, the average price was around Rs 57 lakh.
Most Indians can’t afford these kind of prices. Akhilesh Tilotia in his new book The Making of India, makes an estimate of the price range at which homes will be affordable: “A large portion of the unmet housing needs are at an economic value of Rs 5-10 lakh. Assuming that households of five members can crowd into space of between 250-400 sq ft, housing stock in the range of Rs 1,250-Rs 4,000 per sq ft will be needed.” What this clearly shows is that homes that are currently being built in cities are way beyond what most people can afford.
And this explains why “real estate and ownership of dwelling” constitute only “7.8 per cent of India’s GDP in 2013-14”. In comparison, as data from the National Housing Bank shows, China was at 20%, Malaysia at 29% and the United States at 81%. This number needs to go up in the years to come. And the only way that is possible is if affordable homes become available.
In order to ensure that the nexus between real estate and black money needs to be broken down, so that builders start making homes for people to live in. Whether Jaitley’s efforts bear some fruit remains to be seen, given that many real estate companies are essentially fronts for politicians to hide their ill-gotten wealth.
The last financial year’s Economic Survey made a very interesting point: “Nearly 30 per cent of the country’s population lives in cities and urban areas and this figure is projected to reach 50 per cent in 2030.” If affordable homes are not built, where will all these people live?

The column originally appeared in the Daily News and Analysis dated Mar 3, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])