To fund focus areas, 11-cent hike in real estate tax proposed for

CHATHAM — To pump more money into Pittsylvania County’s coffers, a preliminary budget outlined Tuesday carries an 11-cent real estate tax increase for residents. The finance committee of the Pittsylvania County Board of Supervisors, along with about two dozen residents, met Tuesday to hear the budget presentation

What do you think about India’s 2018 budget?

Completely disagree with those who are praising the budget. My opinion is straightforward! It was a lost opportunity to reform India’s true potential & was primarily focused on near-term political agendas. I’m actually running short of words to describe this budget, let’s just say it was mediocre, extremely prudent & populist. Business/governance is always about give & take. But all we have seen so far is take & take.

  1. LTCG tax was abolished in 2005 to encourage long-term equity investments. To compensate for the revenue loss, the erstwhile UPA government introduced Securities Transaction Tax (STT).[1] That was regressive but understandable to some extent. In 2018, tax on LTCG returns but STT which has been retained. This is a major disappointment and I am sure that this will have negative impact on the market perception in the future. Tax on capital gains is equivalent to mining. It is not worth it if there aren’t enough reserves.
  2. LTCG tax is payable without any indexation benefits.[2] This discourages long-term investment in equities. For instance, capital gains tax on real-estate is payable after calculating cost of indexation for the period along with brokerage costs and costs of improvements.[3] So effectively, the lure to invest in equities is reduced. A really blunt move by the government.
  3. They introduced a 10% Dividend Distribution Tax (DDT) on equity-oriented mutual funds.[4] This will reduce the in-hand return to the investors if they have opted for the dividend option. This suggests that they got too greedy too soon. Please note, that 86% of Indian household savings are in real-estate, around 10% are in fixed deposits and the rest is in gold/currency. Starting 2014, there has been a gradual shift towards equities because of the inherent problems present in the above-mentioned asset classes. This is historic and needs to be nurtured rather than taxed heavily just as investors are getting comfortable with the idea. Even now, majority of the investments are from the top 15 cities and penetration has just started. It is important to understand that tax incentives create a very big psychological effect on investors in India. This is has been witnessed by the success of tax-free bonds issued NHAI, REC etc. as well. If there were no tax benefits, why would anyone buy them? Similarly, the semi-urban & rural Indian population needs tax breaks to convince themselves that equities are actually worth it.
  4. The government increased cess on Income Tax across all slabs from 3 to 4% (a 33% hike).[5] Most people actually expected tax cuts but there has been no change on that front at all. Currently, only 1.6% of the entire working population pays Income taxes. How does the government plan to increase the tax base with these high rates?
  5. The standard deduction was re-introduced at ₹40,000/- per year but the truth of the matter is that medical & travel deductions have been withdrawn & which anyways accounted to approximately ₹34,000. So in effect, there has been a ₹6,000 benefit (₹500 per month). [6]How much difference does that really make to you?
  6. The ₹5,00,000 health coverage for hospitalization for over 10 crore people sounds good on paper but it is easier said than done. The government has to pay insurance premiums and most likely, the budget doesn’t have the provisions as highlighted by some financial experts. Also, what really matters is the type of health coverage. Poor families in India get the worst healthcare imaginable. The important thing to do is to improve & upgrade hospitals, not give under-par healthcare in run down hospitals with outdated equipment and zero hygiene levels. Where’s the focus on improving that?
  7. Corporate tax reduction for businesses with less than 250 crores turnover only from 30% to 25%. Why is that? So basically, small businessmen will have an incentive to remain small and enjoy lower tax benefits and float multiple entities (sister concerns) if turnover exceeds that amount. What about the larger corporate companies which have the ability to increase jobs in India? They haven’t been given any tax reliefs in the face of such a recession. The fact of the matter is that today, the world tax regimes are revising downwards with the US leading the way. India has the highest tax rates in Asia at 34.6% whereas the average of all other Asian countries is around 21.9%. The US is 21% and the European Union is somewhere at 20.5% (Source: Budget Documents). If India does not follow suit, then our companies cannot compete internationally and foreign capital will not find it’s way into our country. Instead of focusing on these issues, the government took the populist route yet again. If you remember, The Finance Minister had said that corporate tax will be reduced to 25% for corporates over a 4 year period. This one turned out to be a googly.
  8. Capital expenditure on Infrastructure has increased and the allocation is ₹1,48,528 Cr. Is that enough? If it is not enough, then the government should’ve simply introduced tax exemptions for infrastructure projects and also give 100% FDI & zero direct tax payments. Also, the biggest problem in the sector has been the lack of ability to fund them. Hence, they could’ve made things lucrative for the private sector. Currently, nobody wants to touch the BOT model because the ROI is extremely poor. Also, the financing has dried up. In fact, the NIIF was a flop show until it was re-erected recently. Too early to judge how it pans out. [7]
  9. The minimum support prices (MSP) of 1.5 times the production costs is a good move in my opinion, but there is no clarity on what “costs” will actually include. This is not my area of expertise so I will refrain from commenting on this.
  10. Customs levies increased on electronic items such as mobile phones. First of all, the share of mobile phone expenditure is quite high among the lower income groups which means they will now have to bear the burden of the customs duty because obviously it will be passed on to the end consumer. Secondly, the government should incentivize manufacturing of electronics before passing such tax policies. The electronics manufacturing industry in India cannot be compared to Shenzen (China) and other hubs in Asia. Here is a list for your reference. India doesn’t even feature in the top 15 yet.[8]
  11. The divestment policy is flawed. The idea should be to reduce government stake to a level that can allow for privatization. This snail’s pace of divestment will not interest the large buyers because the underlying culture, business model and character of these PSUs will not change just by selling small stakes. The government is looking at it from a revenue perspective rather than a structural reforms perspective. There lies the problem in my opinion.

Now most people who read my answer may have assumed that I am anti-Modi or anti BJP. That is far from the truth! I am just one among you all who is expecting the best results from this government. But time and again, they have raised the expectation sky high and when it comes to delivering reforms, they have been streaks of flop shows. Don’t get me wrong, I am a big fan of our PM Narendra Modi but sometimes, we to say things as they are. When I watched the reactions of MDs & CEOs of all these large companies praising the budget, it was weird. I mean, for how long will we move at this pace? The word “reform” has been used far too often, but many are still wondering when they will finally be implemented. I really hope 2018 will be year of change on all the projects that the government has announced but are yet to be completed. I am unbiased in my views. It’s not about my political inclination at all but expectation based on the government’s promises since 2014! In fact, in my college days I have flirted with the idea of joining the BJP.

Footnotes

[1] National Stock Exchange of India Ltd.

[2] Budget 2018: How LTCG tax on shares, equity MF units will be calculated as per proposed rules

[3] Indexed Cost & LTCG Calculator (upto 31/03/2017)

[4] Budget 2018: FM proposes dividend distribution tax in equity MF, dividend seekers to be hit

[5] Budget 2018 hikes cess on income tax to 4 per cent from 3 per cent: Here’s how much more you will pay

[6] https://economictimes.indiatimes…

[7] NIIF to sign first investment proposal in next few days: CEO

[8] Cellphone Exports by Country

 

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