Finance Minister Pranab Mukherjee on Friday announced a fiscally conservative and largely no-shocks middle-of-the-road Budget. Not only has he cut the fiscal deficit to 5.5% in the coming year, but has promised to cut the deficit to 4.8% in FY12 and to 4.1% in FY13.
To achieve this, he has expectedly rolled back the fiscal stimulus by a bit, by raising excise duties from 8% to 10%. Also, the minimum alternate tax (MAT) has gone up to 18% from 15%. Corporates, however, got some relief from the cut in surcharge on tax.
In an exclusive interview with CNBC-TV18, Shanti Ekambaram, Group Head-Wholesale Banking, Kotak Mahindra Bank and Milind Barve, Managing Director, HDFC Mutual Fund, discuss the Budget and give their outlook going forward.
Q: What would you make of this Budget, the markets have celebrated, do you think this is just a repression of the markets because of fear of what payment might hold and just a natural bounce back or do you think there is something game changing in this Budget that might want you to go out and buy some corporates at least?
Barve: If you ask me, the game changing to mind in some sense has been deferred by a year. As far as the capital market is concerned, the changes in tax laws which are likely to happen through the direct tax code (DTC), you heard the Finance Minister say it will be done from April 1, 2011. Now, there are some very important changes in the DTC which have a very strong impact potentially on capital markets particularly equity. I would break it very quickly into two types, it impacts your current holding, your current investments in the markets whether it is equity shares or mutual funds and it has a different set of impact on your new investments. As you know going forward, the direct tax proposals as they stand today seek to tax capital gain at full rate as compared to the zero tax right now. Now, if there is a change in that or if there is a change in that direction, it has a serious implication on the holdings of your equity and mutual funds right now as they will get subjected to full tax on the appreciation, if you are particularly an old investor holding it at a very low acquisition cost and it has a serious implication on that. That is one.
The other is the fact that if you are a new buyer, if you are buying into stocks at the current levels or whatever at higher levels then your incremental tax liability will be little less. But if you are holding assets, holding investments in equities at a very low acquisition cost which you have been holding for years together, you have accumulated a lot of long-term capital gains which is right now not subject to any tax, if that changes to a full-tax regime, then it has some serious implications.
The other change that the DTC seeks to do is on the change in Exempt – Exempt – Taxable (EET) or Exempt – Exempt – Exempt (EEE) and it is very important that the new tax regime recognizes the need to have into incentivise long-term investments and also to incentivise investments through capital markets. If investing in a bank deposits and investing in a capital market product attracts the same tax rates, people will be simply happy putting all their money in banks. So it has a serious implication on domestic investor’s ability to buy the market. So I would say that the Budget obviously has not been a game changer in that sense, very positive on a lot of macro subjects like deficit and so on and managing reasonably smooth roll down of the stimulus. But I think the jury is still out on taxation, as far as capital market is concerned. The DTC holds the key.
Q: India always has had this issue of large book incomes and tax incomes, now we have gone to 18% of book income, how seriously could that retard the reporting of high numbers which is usually a common practice given that now you have to pay 18% on your book income?
Barve: I think if you look at the companies to whom it does impact, it is not an impact which is serious on a market wide basis, but there would be singular companies which are today paying 15% minimum alternative tax (MAT) and they would be subjected to 3% more. I don’t think it is a big game changer, I don’t think it is a big sort of a very radical change for even these companies. It doesn’t smell good because it tends to put a little bit of cost or a disincentive to invest on long gestation projects. But I don’t see a lot of devil in that and in the tax rate going up from 15% to 18%. I don’t think in the context to the companies, it might impact, it is going to be very significant, but as every corporate India doesn’t like increase in tax rates, I guess the companies would be impacted would speak their mind on that.
Source: http://www.moneycontrol.com/news/mf-interview/budget-has-been-positive-notgame-changer-hdfc-mf_444440.html
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