Explained: Jaitley’s Rs 4.44 lakh tax benefit gimmick

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

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)

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

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek 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) 

Of budget, black money and housing

India-Real-Estate-MarketVivek 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]

No "acche din" for govt finances any time soon

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul 

So what do the finance minister Arun Jaitley and the Hindi film industry have in common? They both love the number “Rs 100 crore”. The Hindi film industry cannot stop talking about the films that have done a business of Rs 100 crore or more. Jaitley, in his maiden budget speech, used the Rs 100 crore number 29 times, while making allocations to various government schemes.
This has led a lot of experts to comment that Jaitley has spread himself too thin. Whether that turns out to be the case, only time will tell. Nevertheless, in the budget speech, Jaitley, like finance ministers before him, did not talk about the single biggest expenditure of the government.
The single biggest expenditure of the government of India is debt servicing i.e. the interest that it pays on its debt and the money that it spends in repaying it. Governments all over the world, including the Indian government, spend much more than they earn. This difference is referred to as the fiscal deficit and is financed through borrowing. The money is borrowed for a certain period. During the period a certain amount of interest needs to be paid on it. And at the end of the period, the borrowed money needs to be repaid.
Over the years, the government has been spending more than it has earning. Given this, the fiscal deficit has shot up. In 2007-2008, the fiscal deficit of the Indian government had stood at Rs 1,26,912 crore or 2.6% of the GDP. This had shot up to Rs 5,15,990 crore or 5.7% of the GDP, by 2011-2012. The fiscal deficit projected for 2014-2015 stands at Rs 5,31,177 crore or 4.1% of the GDP.
This increase in fiscal deficit has been financed by a greater amount of borrowing. A greater borrowing has meant that the cost of debt servicing for the government has gone up over the years. In 2009-2010, the total debt servicing cost of the Indian government had stood Rs 2,94,857 crore. The fiscal deficit during the course of that year had stood at Rs 4,18,842 crore. Hence, the ratio of the debt servicing cost to the fiscal deficit worked out to 0.7.
By 2013-2014, the total debt servicing cost had shot up to Rs 5,43,267 crore. As the amount of money borrowed went up, so did the interest that needed to paid on it. And, so did the repayments. The fiscal deficit for the year stood at Rs 5,24,539 crore. Hence, the ratio of debt servicing cost to the fiscal deficit shot up to 1.04.
For the current financial year, the total debt servicing cost has been estimated to be at Rs 6,43,301 crore. Interestingly, in the interim budget presented by P Chidambaram in February earlier this year, the number had stood at Rs 6,74,184 crore. How has the number come down by more than Rs 30,000 crore, that Mr Jaitley did not explain. The fiscal deficit for the year has been projected at Rs 5,31,177 crore. Hence, the ratio of the total debt servicing cost to the fiscal deficit is now at 1.21.
What does this ratio tell us? It tells us that the entire borrowing(and a part of the income) of the government of India is being used to repay past borrowing and to pay interest on it. In simple everyday terms it means that I am using one credit card to pay off what is due on another credit card.
In such a scenario, it becomes very difficult for the government to spend money on other important areas. It also explains to a large extent why Jaitley made so many allocations of just Rs 100 crore. If he had the money, he would have probably preferred a higher amount of allocation. Of course, Mr Jaitley cannot be blamed for this mess which he has inherited from the Congress led United Progressive Alliance (UPA) government.
So what is the way out of this financial hole? The revenue receipts of the government(i.e. the money that it earns through tax and non tax revenue) for the year 2007-2008 had stood at 10.2% of the GDP. For the year, 2014-2015, the revenue receipts are at 9.2% of the GDP.
What this tells us clearly is that the revenue receipts of the government have come down and need to go up. How can that be done? The Modi government has been gung ho about getting the black money of Indians stashed abroad back to India. But what about all the black money that is there in the country? Wouldn’t that be easier to recover?
While the intention to get back all this black money from abroad is certainly noble, how practical is it? Also, if the idea is to recover black money then why discriminate between those who have managed to transfer the money abroad and those who haven’t.
The Modi government can borrow an idea or two from what happened in Greece. In order to recover black money, the Greek government used Google Earth to track those who have swimming pools and then cross indexed their address with the amount of tax they are paying. Ideas along similar lines which use information technology extensively in order to identify people who are not paying the correct amount of income tax, need to be come up with.
In the budget speech made in February 2013, 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. What this clearly tells us is that a lot of people are not paying income tax.
In a country where 27,000 luxury cars are sold every year, the number of individuals with a taxable income of Rs 1 crore has to be more than 42,800. These individuals, who include property dealers, doctors, chartered accountants etc., need to be made to pay their fair share of income tax.
Of course, any such move will not immediately lead to results. The way to do is to execute a few pilot projects in different parts of the country and identify the big defaulters and get them to pay the income tax. This should be extensively publicized as well, so as t ensure that other similar people start paying the right amount of income tax.

The piece originally appeared in The Asian Age/Deccan Chronicle dated July 11, 2014 under a different headline.

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected]

India Inc. benefits from complex tax laws even as it demands simpler ones

The Narendra Modi government will be presenting its first budget in about a month’s time. It is that time of the year when business lobbies meet the finance minister and present him with their wish-list of what they expect from the budget. This year, among other things, the lobbies seemed to have asked for a simpler tax regime. “A simple, transparent and non-adversarial tax regime, bereft of complexities and ambiguities, would go a long way to strengthen business sentiment and restore faith of the foreign investor in the India growth story,” Ajay Shriram, president of Confederation of Indian Industries (CII) told the media. It’s hard to argue with that demand. But a closer examination will reveal that the companies represented by such industry bodies benefit the most from a complex tax system, which allows for a slew of exemptions and loopholes. Do do Indian businessmen really mean it when they say they want a simpler tax regime?
Along with the budget every year, the government of India releases the “statement of revenue foregone”. The statement for the financial year 2013-2014 provides some interesting information about the income tax paid by Indian companies during the 2011-12 fiscal.
The statement considered the tax expenditure of 4,94,545 companies for an interesting bit of analysis. While the statutory tax rate was 32.445%, the effective average tax for these companies came in at 22.85%. What explains this difference of ten percentage points? The complex tax regime. How? We shall see in a moment.

Interestingly, the greater the profits made by a company, the lower was its effective rate of income tax. As can be seen from the table above, companies which made a profit of between Rs 0-1 crore had an effective tax rate of 26.26%. For companies which made a profit of greater than Rs500 crore, the effective rate fell to 21.67%.
More than half the companies in the sample (around 53.2%) had an effective tax rate of up to 20% of their profits. “In other words, a large number of companies (263,315) contributed a disproportionately lower amount in taxes in relation to their profits,” the statement points out.
So, why is there such a huge difference between the statutory rate of income tax and the effective rate that the companies are paying? The only explanation for this is the huge number of deductions allowed by the Income Tax Act, 1961. Every deduction that has been added to this Act over the years has made it inherently more complicated, and less simple. And companies have been taking advantage of this complexity and ensuring that they do not have to pay tax at the statutory rate.
The revenue foregone, or the money that would have flown to the exchequer if all companies paid statutory tax rates, has been rising. The figure was Rs 81,214.3 crore for 2011-2012 and was expected to be at Rs 89,446.6 crore for 2012-2013.
The effective rate of income tax that companies pay has marginally risen over the years. It went up from 20.55% in 2006-2007 to 24.1% in 2010-2011 and fell to 22.85% in 2011-2012. The rate of increase in the effective rate of income tax paid by companies has been very slow.
When companies complain about the complex tax regime, what they mostly mean is that they want a less aggressive income tax department. The complexity in rules translate directly into more money for companies, and in general, they have not been known, anywhere in the world, to lobby hard so they could make less money.

The article originally appeared on qz.com on June 18, 2014