Category: Firstpost | Page 4

8 March, 2016

#EPFnotax: Six reasons why taxing EPF was a stupid idea in the first place

The Narendra Modi government has decided to withdraw their plan to tax the corpus accumulated by investing in the Employees’ Provident Fund(EPF). As the finance minister Arun Jaitley said in the Lok Sabha today: “In view of representations received, the government would like to do a comprehensive review of this proposal and therefore I withdraw the proposal.”

This is a sensible decision to withdraw what was basically a very stupid idea at multiple levels.

a) The finance minister Arun Jaitley in his budget speech had said that only 40% of the corpus accumulated by investing in EPF would be tax free. This would apply on investments made after April 1, 2016.

The entire 100% accumulated corpus could be made tax free by investing 60% of the corpus in annuities. Annuities are essentially policies sold by insurance companies which can be used to generate a regular income.

The trouble is that most annuities in India give a return of around 5-7%. Given this, they remain a bad way to invest a large corpus. Even investing in a long term fixed deposit can give you a better return.

Some savings bank accounts also pay more than the returns that can be generated by investing in annuities. The annuities in their current are essentially nothing but a rip-off and anyone in their right mind would stay away from investing in them.

Then there is the Senior Citizens Savings Scheme, which allows a senior citizen to invest up to Rs 15 lakh. The scheme pays an interest of 9.3%per year. Given that better returns are available elsewhere, why force people to invest 60% of their provident fund corpus into annuities paying 5-7% per year.

b) Also, the change applied only to private sector employees with a salary of greater than Rs 15,000. This meant that the government employees investing in the General Provident Fund (GPF) or employees of public sector companies investing in other recognised provident funds, could withdraw 100% of their accumulated corpus and need not have paid any income tax on it.

Why was the change proposed only for private sector employees? Why was this distinction made on the basis of the employer? If the idea was to tax, the tax should have applied to everyone and not just the private sector employees.

In the way things had been proposed, a private sector employee making Rs 16,000 per month would have had to pay a tax on the accumulated corpus. A government employee need not have done anything like that. How is that fair and equitable?

c) The government has defended this move on the logic of moving towards a “pensioned society”. As the clarification issued by the ministry of finance a few days back pointed out: “The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.”

Why was only the private sector encouraged to move towards a pensioned society? Also, what about those people who are earning less than Rs 15,000 per month. Their need for a regular income after retirement is even greater than those making more money.

d) Also, why make only EPF and other recognised provident funds taxable at maturity. Why leave out the Public Provident Fund? Shouldn’t self-employed professionals who invest in PPF to possibly accumulate a retirement corpus, also be encouraged to become a part of the pensioned society?

e) The government also planned to tax the principal amount invested in the EPF. How fair is this? While calculating capital gains for investments made in stocks or real estate, the principal amount is not included. Also, investments made in real estate and debt mutual funds get indexation benefits, where the impact of inflation is taken into account while calculating the cost of purchasing the asset. This brings down the capital gains on which income tax is paid.

Further, there is no tax on long-term capital gains made on stocks and equity mutual funds. Taking all this into account, how fair was it to decide to tax EPF? Why leave out the investing modes of the rich and decide to tax the middle class EPF?

f) Further, it needs to be realised that different people have different needs. As Jaitley said in the Lok Sabha today: “”Employees should have the choice of where to invest. Theoretically such freedom is desirable, but it is important the government to achieve policy objective by instrumentality of taxation. In the present form, the policy objective is not to get more revenue but to encourage people to join the pension scheme.”

For that to happen there are so many other things that need to be set right. People use their retirement corpus for various things. They use the money to get their children married, educated and so on. While the government may look at this as something that shouldn’t be done but at times there is no option.

Sometimes emergency medical costs are also met out of withdrawing out of the corpus accumulated by investing in the EPF. In a country where there is almost no insurance for the old, how fair is to deny them access to the EPF corpus by deciding to tax it?

What all these points clearly tell us is that the Modi government clearly introduced the idea of taxing the EPF corpus in a hurry. There is clearly more thinking needed on it. Also, several things need to change before such a tax is introduced. And these changes are not going to happen any time soon.

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

The column originally appeared on Firstpost on March 8, 2016

2 March, 2016

Budget 2016: Mr Jaitley, pro-rural steps are all fine but when will we tax rich farmers?

In his budget speech, the finance minister Arun Jaitley came up with a slew of announcements for the farmers of this country. This wasn’t surprising given the fact that the country has seen two bad monsoons, leading to the agricultural growth collapsing to 0.5% over the last two years.

In 2015-2016, agriculture is expected to grow by 1.1%. This is an improvement over 2014-2015, when agriculture contracted by 0.2%. Nevertheless, it is much slower than the overall growth of 7.6% expected in 2015-2016.

As Jaitley said during the course of this speech: “We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor and the vulnerable; we have a dream to see a more prosperous India; and a vision to ‘Transform India’.”

Nevertheless, Jaitley, like finance ministers and governments of the past, continues to molly coddle, the rich farmers. Agricultural income in India continues to be untaxed.

One of the core points of the Survey is about not enough Indians paying income tax.

As the Economic Survey released on February 26, points out: “In India today, roughly 5.5 percent of earning individuals are in the tax net. This statistic gives an idea of the gap that India needs to cover to become a full tax-paying democracy. Based on recent tax data…we estimate that about 15.5 percent of net national income excluding taxes (which is the national income accounts counterpart of the personal income accruing to households) was reported to the tax authorities as gross taxable income.”

This means that nearly 85% of the country is outside the tax net. One clear impact of this is that the government is not able to raise enough taxes as it could. “To give a sense of the magnitudes, controlling for both the level of economic development and democracy, India’s overall tax to GDP is about 5.4 percentage points less than that of comparable countries,” the Survey points out.

While, the government doesn’t collect enough taxes, the rich farmer has the best of all the worlds. He has access to free/subsidised water and electricity. He has access to free fertilizer and benefits the most from minimum support price that the government offers on the purchase of rice and wheat. In fact, the Economic Survey points out that the implicit subsidy on electricity is Rs 37,170 crore.

The rich farmers benefit the most from cheap or free electricity. As Swaminathan Aiyar wrote in a recent column in The Times of India: “During a Punjab visit, I was told of one Jat farmer with 150 tubewells, paying zero electricity charges.”

In fact, as the Economic Survey points out: “India uses 2 to 4 times more water to produce a unit of major food crop than does China and Brazil.” This is primarily because of free or cheap electricity leading to over-pumping of water.

As the Economic Survey points out: “It has long been recognized that a key factor undermining the efficient use of water is subsidies on power for agriculture that, apart from its benefits towards farmers, incentivises wasteful use of water and hasten the decline of water tables. According to an analysis by National Aeronautics and Space Administration (NASA)5 , India’s water tables are declining at a rate of 0.3 meters per year. Between 2002 and 2008, the country consumed more than 109 cubic kilometers of groundwater, double the capacity of India’s largest surface water reservoir, the Upper Wainganga.”

This is clearly not a good thing.

And on top of this rich farmers do not pay any income tax. A lot of this money makes it into real estate, especially on the edges of cities and towns, making it unaffordable for others.

Further, if the government hopes to up its tax collections significantly in the years to come, the rich farmer needs to be brought under the tax net. As the Economic Survey pointed out: “The tax exemptions which often amount to redistribution towards the richer private sector will also need to be reviewed and phased out. And, reasonable taxation of the better-off, regardless of where they get their income from—industry, services, real estate, or agriculture–will also help build legitimacy of India.”

Jaitley like his predecessors chose to do nothing about this. This is not surprising given that taxing the rich farmer remains a political hot-potato. The governments over the last 25 years could not have done it, given that they lacked the majority to do so.

The Modi government has the majority in the Lok Sabha, but given the fractious relationship it shares with the opposition, any significant decision is likely to attract a lot of protest. Plus there are elections in Punjab coming up, where Modi’s Bhartiya Janata Party (BJP) is in alliance with the Akali Dal, which is essentially a party supported by rich farmers.

Finance ministers are not known to listen to the advice provided in the Economic Survey. Nevertheless, if Jaitley had taken on this advice, the whole country would have been better-off in the process.

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

The column originally appeared on Firstpost on February 29, 2016

1 March, 2016

Budget 2016: Does the extra deduction of Rs 50,000 for home-buyers really help?

In the budget speech finance minister Arun Jaitley made yesterday he said: “For the ‘first – home buyers’, I propose to give deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh.”

How much will this help? Let’s understand it through an example. Let’s take the case of a man borrowing Rs 35 lakh from the State Bank of India at 9.55% per year, repayable over a period of 20 years. The EMI for this works out at Rs 32,739.

Every time an EMI is paid, a part of the principal is repaid as well. And the remaining part goes towards the payment of interest. Hence, with every EMI paid, the principal amount of the loan that still needs to be paid comes down. This means with every EMI, the interest component of the EMI keeps coming down, and the principal repayment keeps going up.

In the first 12 EMIs, a total interest of around Rs 3.32 lakh is paid. Currently, only a deduction of up to Rs 2 lakh is available while calculating the taxable income on, when it comes to the interest paid on a home loan for a self-occupied property. Now a deduction of upto Rs 2.5 lakh can be taken to the condition the loan is upto Rs 35 lakh and value of property is not greater than Rs 50 lakh. Hence, this is a good move to that extent. For those in the top income-tax bracket of 30.9%, it means a tax saving of Rs 15,450.

Assuming the interest rate continues to be the same, how will things pan out. In the second year, the interest paid amounts to around Rs 3.26 lakh. The extra deduction of Rs 50,000 will continue to be available in the second year as well.

How many years is this extra deduction likely to be available? It will be available until the interest part of the EMI continues to be greater than Rs 2 lakh, the deduction which is already available, assuming the government continues with this provision in the years to come.

How long will this last? This will go on for 13 years. After that the interest being paid will fall below Rs 2 lakh per year and hence, this extra deduction of Rs 50,000 will be of no use. Given this, the tax saving will turn out to be reasonably good over a long period of time.

This move will help many people living in cities, which come after the metropolitan cities. It will also benefit those living in cities who are comfortable living on the outskirts.

Will it provide a fillip to the real estate industry? I am not so sure about that. Lack of money is not the only reason that people have stayed away from buying real estate. High prices continue to remain a huge issue. Another major reason is the inability of the industry to deliver a home on time. Further, a few builders have disappeared after taking on money from prospective buyers. All these reasons have kept the home-buyer away.

Also, it needs to be pointed out here that the finance minister could have done the cause of people looking to buy a home to live in even more good, by plugging a huge loophole in the Income Tax Act, when it comes to home loans.

On the self-occupied property, an interest of up to Rs 2 lakh can be claimed as a tax deduction. This limit applies only to the self-occupied property and not on other homes that a tax payer may choose to buy.

Any amount of interest paid on home loans can be claimed as a deduction as long as a “notional rent” is added to the income. We all know that these days “rents” are very low in comparison to the EMIs that need to be paid in order to repay the home loan. The rental yield (rent dividend by market value of the home) is in the region of 2-3%.

Even after deducting a notional rent, the interest component tends to be massive during the initial years and helps people with two or more homes, claim huge tax deductions.

This “deduction” has been used over the years by well-paid corporate employees to bring down their taxable income. Further, individuals who use this deduction benefit on two fronts—tax deduction as well as capital appreciation. Even if, the capital appreciation is not huge, such individuals are happy in claiming just the deduction than actually making money from an increase in price. Hence, they may not sell the flat, even in a scenario where prices may be falling.

While offering a tax deduction on a self-occupied property makes some sense, there is no logic to offering a tax deduction on a home, one is not living in. This “deduction” needs to be plugged immediately as it encourages speculation.

Jaitley could have done the cause of the prospective home buyer even more good by plugging in this loophole. But sadly that did not happen.

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

The column was originally published on Firstpost on March 1, 2016

9 February, 2016

What the GDP numbers tell us about the fiscal deficit

The Central Statistics Office(CSO) has published the economic growth numbers for the period October to December 2015. It has also put out the economic growth projection for the current financial year i.e. 2015-2016 (April 1, 2015 to March 31, 2016).

The Indian economy grew by 7.3% during the period October to December 2015. It is projected to grow at 7.6% during 2015-2016. Economic growth is measured by the growth in the gross domestic product(GDP). But GDP is a theoretical construct. There are many high frequency economic data indicators which tell us very clearly that there is no way that the country is growing at the rate at which the government wants us to believe it is.

Much has been written about the fact that India’s economic growth numbers can’t be possibly right and given that I wanted to discuss something else, but equally important in this column.

The GDP growth is declared in several forms. When CSO talks about the Indian economy growing by 7.6%, during the course of the year, it is talking about real GDP growth. Real GDP growth is essentially adjusted for inflation. The economic growth which is not adjusted for inflation is known as the nominal GDP growth. The nominal GDP growth for the current financial year is expected to be at 8.6%. Typically, the difference between nominal and real GDP growth is greater than this.

When calculating the fiscal deficit, the government uses the nominal GDP. This is because the revenue as well as the expenditure of the government are not adjusted for the prevailing inflation. Fiscal deficit is the difference between what a government earns and what it spends during the course of the year.

When the finance minister Arun Jaitley presented the budget in last February, he had set a fiscal deficit target of 3.9% of the GDP. The GDP here is the nominal GDP. There are essentially two numbers in the fiscal deficit calculation—the absolute fiscal deficit number and the nominal GDP number.

The absolute fiscal deficit number for this year was set at Rs 5,55,649 crore. The nominal GDP number in the budget was assumed to be at Rs 14,108,945 crore. It was assumed that the nominal GDP would grow by 11.5% in comparison to the nominal GDP in 2014-2015, which was at Rs 12,653,762 crore.

The growth of 11.5% in nominal GDP has not materialised and now close to the end of this financial year, the government thinks that the nominal GDP growth will be at a much lower 8.6%. And this is precisely what has upset the fiscal deficit calculations of the government. A growth of 8.6% means that the nominal GDP for 2015-2016 will come in at Rs 13,741,986 crore.

If the government maintains an absolute fiscal deficit of Rs 5,55,649 crore, then the fiscal deficit as a proportion of the nominal GDP will come in at 4.04% of the GDP. In order to maintain the fiscal deficit at 3.9% of the GDP, the government will have to cut down the fiscal deficit by around Rs 20,000 crore, assuming all other projections remain the same.

A fiscal deficit of 4.04% of the GDP is higher than 3.90% of the GDP, but not significantly higher. But that is not what has got the government worrying. In fact, the finance minister Arun Jaitley had talked about fiscal consolidation in the two budget speeches he has made till date in July 2014 and February 2015. Fiscal consolidation is the reduction of the fiscal deficit.

In July 2014 Jaitley had said: “We need to introduce fiscal prudence that will lead to fiscal consolidation and discipline. Fiscal prudence to me is of paramount importance because of considerations of inter-generational equity. We cannot leave behind a legacy of debt for our future generations. We cannot go on spending today which would be financed by taxation at a future date.”

He had further said: “One fails only when one stops trying. My Road map for fiscal consolidation is a fiscal deficit of 3.6 per cent [of the GDP] for 2015-16 and 3 per cent for 2016-17.”

In the speech he made in February 2015, he postponed this target by a year and said that the government will achieve a fiscal deficit of 3.5% of GDP in 2016-17; and 3% of GDP in 2017-18.

The point being that the government had originally envisaged achieving a fiscal deficit of 3.6% of GDP during this financial year. This target was postponed by a year and the government set itself a much easier target of 3.9% of GDP. And given this, it is very important that the government achieve this much easier target, if it wants people to take it seriously in the future on the fiscal deficit front.

Further, it is worth pointing out here that typically if the government were to follow the international norms of declaring the fiscal deficit and not include disinvestment proceeds as a revenue item but a financing item, the fiscal deficit for 2015-2016 would be at 4.4% of the GDP. Also, the 3.9% of GDP fiscal deficit target does not include subsidy payments of more than Rs 1,00,000 crore that need to be made for fertilizer and food subsidies.

The government can achieve a 3.9% of GDP fiscal deficit target, by increasing its revenue and cutting down on its expenditure. The government has been trying to increase its revenue by increasing the excise duty on petrol and diesel. Three such hikes have been made since January 2016. This has led to a situation where oil prices have fallen dramatically but petrol and diesel prices in India have actually risen over the last one year.

The petrol price in Mumbai as of now is Rs 66.05 per litre. The price as of last February was at Rs 63.9 per litre. The price of the Indian basket of crude oil during the same period has fallen by more than 44%.

While the government continues to raise the excise duty on petrol and diesel, it continues to own a 11.2% stake in cigarette maker ITC. This stake as of yesterday’s closing price was worth Rs 28,256 crore. What is so strategic about owning a stake in a cigarette company and at the same time run advertisements trying to tell the country at large that it consumption of tobacco is injurious to health? Why can’t this stake be sold and the money used for better purposes?

This is something that the government needs to explain.

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

The column originally appeared on Firstpost on February 9, 2016.

16 December, 2015

Shale vs crude: Why oil prices are on a free fall even as Opec members suffer

The latest price of the Indian basket for crude oil was at $35.72 per barrel. It has fallen by 16% over the last one month and by 33% since end December 2014.
Yesterday, the Brent crude oil was selling at $37-38 per barrel. Lower quality oil is selling at even below $30 per barrel. As Amrbose Evans-Prtichard writes in The Telegraph: “Basra heavy crude from Iraq is quoted at $26 in Asia, and poor grades from Western Canada fetch as little as $22. Iran’s high-sulphur Foroozan is selling at $31.”

What has led such low levels of oil price? Over the last one year, the Organization of the Petroleum Exporting Countries(OPEC), an oil cartel of some of the biggest oil producing countries in the world, has been flooding the market with oil in order to make the shale oil being pumped in the United States, unviable. Pumping shale oil is an expensive process and is not viable at lower oil price levels.

In fact, the oil ministers of the OPEC countries met in early December and they pretty much decided to continue doing things the way they have been up until now, over the last one year. In the past, any likely slowdown in oil prices was met with oil production cuts within the OPEC. That hasn’t happened over the last one year and isn’t happening now either.

As the International Energy Agency(IEA) points out in its monthly oil report for December 2015: “OPEC’s decision to scrap its official production ceiling and keep the taps open is a de facto acknowledgment of current oil market reality. The exporter group has effectively been pumping at will since Saudi Arabia convinced fellow members a year ago to refrain from supply cuts and defend market share against a relentless rise in non-OPEC supply.”

The rise in the supply of non-OPEC oil has primarily happened on account shale oil being pumped in the United States and to some extent in Canada, over the last few years. In order to make companies pumping shale oil unviable, OPEC has been relentlessly pumping oil. As the IEA monthly report points out: “OPEC supply since June has been running at an average 31.7 million barrels per day, with Saudi Arabia and Iraq – the group’s largest producers – pumping at or near record rates. Riyadh has held supply above 10 million barrels per day since March to satisfy demand at home and abroad while Iraq, including the Kurdistan Regional Government (KRG), is doing its level best to keep production above the 4 million barrels per day mark first breached in June.”

Also, as oil prices have fallen, OPEC and non-OPEC oil producing countries have had to pump more and more oil, in order to ensure that their governments have some money going around to spend. As the Russian finance Anton Siluanov told Ambrose. “There is no defined policy by the OPEC countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on.”

Further, sanctions against Iran are likely to be lifted early next year and more oil will then hit the international oil market. The Financial Times quotes an oil trader as saying: “It seems the Iranians are fulfilling the requirements for the lifting of sanctions faster than expected.” said one London-based oil trader.

The IEA monthly report expects the extra oil from Iran to add 300 million barrels to the already swelling oil inventories. In fact, the November 2015 oil report of the IEA had put the total global stockpiles of oil at 3 billion barrels.

So how long will this last? Given the number of factors that impact the price of oil, predicting which way it will head, has always been tricky business. As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction: “Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

Nevertheless, it seems that one year down the line the Saudi strategy of driving down the price of oil, in order to drive down non-OPEC oil production seems to be working. As the IEA oil report points out: “There is evidence the Saudi-led strategy is starting to work. Lower prices are clearly taking a toll on non-OPEC supply, with annual growth shrinking below 0.3 million barrels per day in November from 2.2 million barrels per day at the start of the year. A 0.6 million barrels per day decline is expected in 2016, as US light tight oil – the driver of non-OPEC growth – shifts into contraction.”

Also, it is worth pointing out here that oil exporting countries are having a tough time balancing their budgets. The fiscal deficit of Saudi Arabia has touched 20% of its gross domestic product (GDP). Fiscal deficit is the difference between what a government spends and what it earns. As Evans-Pritchard puts it: “Opec revenues have collapsed from $1.2 trillion a year in 2012 to nearer $400 billion next year.”

Hence, it is safe to say that the OPEC strategy of driving down the price of oil is hurting the member countries. Given this, the price of oil cannot be at such low levels for much long. But at least in the short run, the oil price will continue to stay low.

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

The column originally appeared on Firstpost on December 15, 2015