Overview of Budget

Overall the budget is not a ground-breaking one but more of a steadying hand at the Indian fiscal wheel and an exercise in fiscal discipline.

The FM as usual stuck a positive note saying that CPI inflation has come down to 5.4% from 9+ and said it is a huge relief to the public.

Rents

Impact the salaried segment? We have had several questions about rents. The House Rent Allowance (HRA)?

Next measure of impact to the salaries segment – the HRA deduction u/s 80GG.

In short, it’s a deduction for rent paid is being from Rs 20,000 to Rs 60,000 to benefit those living in rented houses Right now people who do not have any house of their own and also do not get any house rent allowance (HRA) from any employer currently get a deduction of Rs 24,000 per annum from their income to compensate them for the rent they pay. This limit is to be increased to to Rs 60,000 per annum, which should provide relief to those who live in rented houses.

Income Tax

Budget impact on the salaried segment.?

First, was there any impact on income tax?

FM decided not to change ANYTHING with the income tax slab rates – usually tweaked at least a bit by every FM.

What might have a big impact is that 60% of EPF deposits is to be taxed on withdrawal This was apparently introduced as a measure to bring parity between the New Pension Scheme and other retirement schemes This applies to contributions made after April 1, 2016 to EPF and other schemes.

As you know all know, at present, social security schemes run by EPFO are tax free EEE schemes (exempt at time of contribution, accumulation and at withdrawal) but this apparently is no longer going to be case.

Pensions

The FM has given a big boost to the National Pension Scheme (NPS) by allowing a separate deduction of ₹50k over above Sec.80C limit of ₹1.5lakhs and proposed to make withdrawal upto 40% of corpus at time of retirement tax exempt.

He wants India to be a “pensioned society instead of pensionless society” When will be “tensionless” Mr.FM The Budget also the limit for contribution to pension plans- insurance pension, annuity plans and NPS-from ₹1 lakh to ₹1.5 lakh. In general, NPS now competes with insurance, PPF, EPF etc.

There seems to be a move to bring all retirement products onto a level playing field.

What about the stuff we buy?

Car prices are likely to increase as the FM announced a 1% “infra cess” on small petrol/LPG/CNG cars and 2.5% tax on sub-4 metre diesel cars up to 1500cc.

There is an additional 1% tax on luxury cars and 4% on higher capacity sedans, SUVs.

Cigarettes are going to be costlier, The FM proposed a hike in excise duty on tobacco products by 10-15%. Jewellery’s is likely going to be costlier as 1% excise duty will be levied on all articles of jewelery except silver.

A clean energy cess has been increased from ₹200/tonne to 400/tonne on coal which might increase the input cost for power companies and might be transferred to customers increasing cost of electricity.

Skill India

The Budget 2016 impact on students and the education sector.

The FM announced a new higher education financing agency with a fund of ₹1,000 crore .

While this is a welcome move, it is not clear whether it is enough, The FM also announced an enabling regulatory architecture to be provided for 10 public & private institutions to emerge as world-class teaching institutions.

There seems to be a new buzzword in town – “Skill India” – tell us about that?

The FM said it aims to skill 1 crore youth in the next 3 years under the Pradhan Mantri Kaushal Vikas Yojana. ₹ 1,700 crore is being set aside for skill institutions.

1500 Multi skill training institutes will be set-up. Various launching entrepreneurship training and massive online courses are to be launched.

The FM said that the Govt plans to 62 more Navodaya Vidyalayas and start a digital literacy scheme for rural India.

Overall, we can say to the FM with respect to students needs. It is felt that the FM has not addressed many pressing areas in this sector such as foreign investment in India education, increasing research, improvement of quality of education as well as better implementation of RTE.

Farmers

Onto the third impact area we’ve a tonne of questions on agriculture and the rural sector.

Well one thing is clear – this budget had tremendous focus on the rural sector and agriculture. In a sense, one can say that this was a pro-farmer budget.

The FM made it clear that the aim was to double the farmer’s income in the next 5 year.

He announced various allocations to agriculture, farming and welfare with a total expenditure of ₹35,894 cr  for agriculture in 2016-17 . Also, dedicated irrigation in NABARD of ₹ 20,000 cr

The FM announced various allocations to agriculture, farming and welfare with a total expenditure of ₹35,894 cr for agriculture in 2016-17. Dedicated irrigation in NABARD of ₹ 20,000 cr  The FM nominal premium and highest ever compensation in case of crop loss under the PM Fasal Bima Yojna.

The outlay for the popular MGNREGA scheme to ₹ 38,500 cr. The FM also said the target for agri credit would be ₹ 8.5lakh crore in 201-16 and ₹ 19,000 cr would be allocated for rural roads development Overall, a staggering ₹ 87,765 cr was allocated for rural development as a whole.

Health & Social Security

The new health protection scheme will provide health cover up to ₹ 1 lakh per family Senior citizens get an additional top-up of ₹ 30,000

In addition, “National Dialysis Service Programmes” are to be started under National Health Mission through Public-Private Partnership mode.

Business

The FM true to his promise last year, began the process of phasing out corporate tax exemptions.

However, he restricted marginal reduction in corporate taxes to only small companies.

Jaitley lowered the corporate tax rate for companies with a turnover of ₹ 5cr or less to 29% from 30%…Sorry, no such luck for “big” companies….at least not yet.

The FM a corporate tax rate at 25% for all new manufacturing companies incorporated from 1 April – provided they don’t claim any exemptions.

In my view a 25% tax rate without exemptions may be a good idea, because in reality most exemptions were being scrutinized, litigated and fought over between taxpayers and the department.

The FM for the first time in Indian history introduced a special patent regime with 10% rate of tax on income from worldwide exploitation of patents developed and registered in India. Pharma companies reacted positively saying it will spur local innovation and manufacturing; in general taxes are at 35% and 10% tax will be a significant boost.

R&D and Logistics

There was some disappointment in research-oriented companies.

The FM in his phasing out of exemptions also laid out roadmap to reduce and eventually do away with “weighted deductions” for R&D expenditure which is key a deduction for most research companies (ranging from 150 to 300% based on industry)
The logistics sector was also disappointed with the FM in the name of discouraging imports announced imposition of 14% service tax on services provided by domestic shipping companies transporting goods outside India from 1 June 2016.

Shipping companies will be affected but will likely pass on the cost to us comsumers. I feel one bright spot though was the zero rating (with effect from 1st March 2016) of services provided by India shipping lines by way of transport of goods by aj vessel to outside India.

Start-Ups India

Let’s talk about the Budget 2016 with respect to start-ups and micros/small/medium enterprises (MSME’s)

First and foremost, in the “Startup India” action plan, the FM a 100% deduction of profits for 3 out of 5 years for start-ups from April 2016 to March 2019, with certain riders. I note that this similar to the tax benefits given to software companies and export oriented units etc in the past – all of which were well-directed, but ended up with lots of implementation issues and litigation.

Hope this start-up scheme is implemented well Mr. FM

Secondly, the shortening of the holding period from 3 to 2 years to get the benefits of Long-term Capital Gains (LTCG) regime in case of unlisted companies (including startups) is a welcome move.

Thirdly, the registration of a company should take no longer than a day under the Government’s 1-day Incorporation Policy.This is too good to believe, but let us hope for the best.

One of the more important aspects, in my view, was the Government’s definition of a “start-up” which can avail the benefits of the “Start-up Action Plan” as “a company which would have equity funding of at least 20% by incubation, angel or private equity fund, an accelerator or angel network registered with SEBI endorsing the innovative nature of the business” Well, we will see how this pans out.

Overall, Budget 2016 was very positive for start-ups as was expected with the PM’s huge push for “Start-up India”

Black Money

The FM announced a 4 month compliance window for domestic black money holders.

Under this scheme, one can clear past transgressions by paying tax at 30% and a surcharge at 7.5% and penalty at 7.5% – total of 45% of undisclosed income.

Well, is this similar to the famous (or infamous) VDIS scheme of the 1990’s when PV Narasimha Rao government was made richer by several hundred crores, after the Congress announced the scheme where individuals and corporates were allowed to disclose black money

I’m guessing 45% is enough for people to continue keeping it stuffed in their mattresses .It is not clear @ 45% tax rate whether there might be many takers, though it will get them immunity from scrutiny and prosecution. Only time will tell, but the FM was clearly at pains to explain why this scheme was not an amnesty scheme like VDIS because it had a penalty component in it . The Government introduced a similar scheme last year to bring back undeclared foreign assets, but that did not do well and yielded much less than what was touted.

Infrastructure

The FM’s Budget 2016 was big on infrastructure.

Grandiose investments in roads totalling ₹ 97,000 cr were announced. The total outlay for infrastructure in Budget 2016 stood at a whopping ₹ 2,21,246 cr . An allocation of ₹ 55,000cr directly for roads and additional ₹ 15,000 cr to be raised through bonds was announced.

An ambitious target of converting 50,000km of state highways into National Highways was set. The announcement of new greenfield ports on the east and west coasts of India will surely please the infrastructure majors. The revival of under-served airports, plus the Centre partnering with States for reviving small airports were welcome measures.

(Singh Sahab- singhsahabthegreat.ss@gmail.com)

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