New Delhi, March 18
Admitting political compulsions had led to a cautious budget devoid of big bang announcements, Finance Minister Pranab Mukherjee said Sunday he had to keep the ground reality in mind while framing the proposals.

Responding to criticism that the fiscal 2013 budget did not take bold decisions, he said he was “extra careful” while formulating his proposals in view of the political situation. He also made the point that “enjoyment” after such decisions may have been shortlived as policies may not have got Parliament’s approval.

In his customary post-budget interaction with industry, the minister said expectations from the budget were high this year as next year is widely believed to be an “election budget”. “Knowing the mood of the people who matter here (in Parliament), I had to be extra careful and had to make my colleagues extra careful. Therefore, many of things that could have been done, rather should have been done, couldn’t be done just at the time of the budget,” he said.

He said he had to keep in mind the prevailing ground reality that a “decision taken in one House is reversed or changed within 24 hours, when the same proposal approved by one House comes to the other House”.

On the issue of oil subsidies, Mukherjee made it clear corrective measures would have to be taken by consulting all stakeholders, including political parties. He said the question that was looming is whether the country will have the capacity to keep incurring such subsidies.

The government also made it clear its intent to slug it out on the Vodafone tax case. While Mukherjee scotched speculation that the amendment moved in the budget would mean all offshore transactions since 1962 would be reopened, he stressed no case beyond the last six years could be reopened in the existing income tax provisions.

Finance secretary R.S. Gujral said the amendment has been moved to provide a clarification for the courts. He added the deal should be taxed as it was a case of no taxation rather than of double taxation.

Gujral said the concept of equity had to be maintained since the entire collections accruing from the increase in excise and service tax would be close to Rs 40,000 crore, while revenues in this case alone would yield that much. Since the underlying asset and business was in India, capital gains needs to be paid.

He allayed fears this move would hit foreign direct investments, saying “FDI comes in where investors see profitability and not zero taxes. China has levied a similar tax due to this transaction and FDI inflows have not suffered”. 

New Delhi, March 18
Planning Commission deputy chairman Montek Singh Ahluwalia on Sunday said that generally changes to laws should not be implemented retrospectively, even as he termed the proposed amendment to the Income Tax Act to tax Vodafone-like deals as "appropriate".

"I think, objectively, the change is not only appropriate one....It is something we have singled in the Direct Taxes Code (DTC). Going by general rules. But I agree with you that one should avoid retrospective amendments," Ahluwalia told Karan Thapar in the Devil's Advocate programme on a TV channel.

According to amendments proposed in the Income Tax Act by Finance Minister Pranab Mukherjee in his budget proposals, all persons, whether residents or nonresidents having business connections in India will have to deduct tax at source and pay it to the government even if the transaction is executed on foreign soil.

The amendments, once carried out, will have implications on Vodafone which won the Rs 11,000 crore tax dispute case against tax authorities in the Supreme Court. It will also impact other similar cases involving taxes to the tune of about Rs 30,000 crore.

About the impact of the proposed amendment on Vodafone case, Ahluwalia said: "I do not want to comment on the impact on any particular company. I think... it is not only appropriate one, but something we have singled out in the proposed Direct Taxes Code . We are going to do that anyway."

On the impact of this move on foreign investment flows, he said: "Whenever you have retrospective amendment which affects an individual, he will certainly feel that he has been treated unfairly."

However, Ahluwalia allayed fears this would impact the flow of foreign funds into the country. "I think that foreign investors should have absolutely no doubt in their mind that the government does not intend to change some of the basic conditions retrospectively. — PTI

Q: My annual income is Rs 4.5 lakh and I try to give one-tenth of my salary to social welfare organizations. What is the optimal way to get a tax rebate on my donations? If I form a trust for the welfare of my children, will it help me in saving tax? — Mandeep Singh Sidhu

A: You can get a tax rebate on donations to a charitable trust provided the latter is an approved institution under the provisions of the Income Tax Act, 1961. Before you make any donations please ensure the trust has been issued the relevant exemption certificate by the income tax commissioner. You will be entitled to claim deduction from your gross income to the extent of 50% of the donated amount. In case the amount exceeds 10% the permissible deduction would be limited to an amount not exceeding 10% of gross income. This rebate is allowable in case of charitable trusts. A trust formed for the welfare of your children will not be covered in this category.

Q: Is a scholarship or stipend given by the government to MD/MDS/MS students taxable? — Surinder Pal Singh Juneja

A: Section 10(16) of the Income Tax Act, 1961 exempts scholarships granted to meet the cost of education. As such, any scholarship granted to MD/MDS/MS students would be exempt from income tax.

Q: I'm a retired army officer and getting a pension (both service and disability), on which I'm paying income tax. Someone informed me that total pension (i.e. disability element and service element of disabled Army Officer, is exempted from Income-tax. Kindly advice / clarify Am I exempted from tax on the total (i.e., disability and service) and, if so, what is the relevant government regulation for this exemption? — Lt. Col. (retd) Kashmir Singh Maltani

A: A disability pension received by army personnel is not taxable. This has been clarified in this column published on February 27, 2012.

Q: You had said in your reply to my earlier query that there is no limit on tax exemption on money gifted to one's wife, son, grandson and granddaughter. I had submitted my income tax returns and later got a TDS (tax deducted at source) refund from the income tax department. However, in another case, where a senior citizen like me gifted Rs 60,000 to his married daughter you clarified there was no tax rebate on the amount. What is the correct position on this issue under the income tax law and has the relevant provision(s) been amended recently? — Ram Sarup

A: It was clarified earlier in this column that the amount gifted to a close relative (wife, son, grandson or granddaughter) are not taxable. However, it has been nowhere stated such an amount is deductible from an assessee's gross income. There has been no amendment in the law and the provision as explained above has been in force for quite some time.

New Delhi, March 18
The government aims to tap various assets to raise an estimated Rs 1.52 lakh crore (over US $30 billion) in the next fiscal, nearly half of which could come from telecom spectrum sale and disinvestment in public sector units.

The targeted proceeds worth Rs 151,717 crore from the government's physical and capital assets would account for more than one-tenth of its total revenue receipts in 2012-13. This would be much higher than the amount garnered by levying even an increased service tax of 12% during the year.

According to the budget estimates for fiscal 2012-13, the government is looking to raise Rs 30,000 crore through part-sale of its stake in various public sector companies. Additionally, over Rs 27,000 crore is expected to come through dividend payments from PSUs. It is also expecting nearly Rs 23,000 crore in form of dividend from the RBI and various nationalized banks and financial institutions, taking its total dividend estimate for 2012-13 to over Rs 50,000 crore. Besides, the government is looking at total proceeds of over Rs 58,000 crore from its various telecom assets, including Rs 40,000 crore from sale of spectrum next year.

From its energy assets also, the government is targeting funds worth over Rs 13,300 crore, most of which would come in form of royalty on offshore petroleum assets.

In its budget for FY2012-13, the government has estimated total receipts of nearly Rs 14.9 lakh crore, out of which about Rs 7.7 lakh crore would come from tax revenues, close to Rs 1.64 lakh crore from non-tax revenues and about Rs 5.55 lakh crore as capital receipts. — PTI

It was an extremely action packed and volatile week on the bourses last week. There was plenty of drama and one wonders what we are seeing is reality or the unheard or absurd that is happening. The railway minister first increased freight rates about ten days prior to the presentation of the rail budget, signaling something dramatic was to happen. Then after a period of almost nine years passenger fares were increased in the budget. The fare increase was in paise per kilometre of journey and was across class of travel and distance. The passenger fare hike was between 20%and 35% and was done by a member of the Trinamool Congress party, who demanded the resignation of the minister (its own party member).

The demand remains and one is not sure what would happen finally, but it certainly was theatre of the absurd. The mood was set for the budget to take tough steps and there would be a substantial reduction in subsidies.

This all happened on Wednesday and the next day there was no change in the credit policy announced by Reserve Bank of India. Interest rates were not changed and probably the Reserve Bank of India governor was correct in his assessment as one feels that post the fiscal 2012-13 budget there was no way inflation could be curtailed or kept in check. With excise duties going up from 10% to 12% and service tax being similarly raised from 10% to 12%, there will be a cost push increase in the economy leading to higher inflation. At least for the time being, there is no possibility of interest rates being eased.

Secondly, with the government borrowing programme budgeting to borrow Rs 5 lakh crore, this would have a cascading effect and ensure interest rates remain high.

The Bombay Stock Exchange Sensex lost a paltry 37.04 points or 0.21% to close at 17,466.20 points, while the National Stock Exchange lost 15.65 points or 0.29% to close at 5,317.90 points. The broader markets saw the BSE 500, BSE 200 and BSE 100 lose a little more at 0.26%, 0.34% and 0.38%, respectively.

The BSE SmallCap lost 0.66% while the BSE MidCap was a gainer for the week, up 0.50%. The markets on a weekly basis look fairly range bound but was extremely volatile with the Sensex making an intraweek high of 18,040.69 points on the day of the rail budget. The fall from there at the end of the week is 574.49 points. Similarly, the Nifty intraweek high was 5,499.40 points and the loss from that level was 181.50 points.

The BSE FMCG index was the top performer gaining 2.94% and the BSE Auto rose 1.35%. On the losing side were the BSE PSU (down 1.42%) and the BSE Oil (down 1.14%). In individual stocks Hindalco gained 4.27%, ITC was up 3.74% and Tata Motors rose 2.69%. ONGC lost 3.38% while TCS fell 3.22%.

The budget has introduced a negative list of services that alone would be outside the purview of service tax. All other services would be taxed at 12% plus the surcharge. The finance minister aims to mop up close to Rs 19,000 crore through service tax. Similarly, the increase in excise duty which is also across the board would raise Rs 22,000 crore.

There is a consolation relief to the individual taxpayer whose taxfree limit has been raised from Rs 1.8 lakh to Rs 2 lakh and, similarly, the slabs of 10%, 20% and 30% have been raised from Rs 2 lakh to Rs 5 lakh. There is no change in corporate tax. Interest income from bank savings account of up to Rs 10,000 is exempt.

As far as the stock market is concerned the budget has lowered securities transaction tax on trades resulting in delivery to 0.1% against 0.125%, but the benefit is lost on account of the higher service tax that would be payable. There is a new Equity Saving Scheme that will allow 50% deduction in tax to new retail investors who invest directly in equity up to Rs 50,000 and whose annual income is up to Rs 10 lakh. However, there is a catch in this scheme that the same is available on a compulsory lock-in of your purchases for 3 years.

The growth in GDP is estimated at 7.6% +/- 0.25% and the fiscal deficit for FY 2013 is estimated at 5.1%. Readers would recall that the original estimate of fiscal deficit for FY12 was 4.6% which has risen to 5.9%. There is also a catch here that the estimated revenues from tax collections are expected to grow by 22% which seem grossly overstated. Once that does not happen the deficit figures would again increase.

The market is not happy with the lack of commitment from the finance ministry on introducing the Direct Taxes Code and the Goods & Services Tax Bill A delay will hurt the economy and affect growth.

Liquidity has been the biggest driver in the stock markets and till last week there was no effect on liquidity. Foreign institutional investors invested Rs 5,435 crore during the week while domestic institutions sold stock worth Rs 2,240 crore. The only silver lining so far is this liquidity and one hopes that this simply continues.

The markets are looking vulnerable and would continue to be choppy in the coming week. Broadly speaking levels of 18,000 on the BSE Sensex on the upward would act as a major resistance and then 18,500 while 17,200 and then 16,750 would act as supports. In the case of the NSE Nifty, 5,500 and then 5,650 would act as resistances, while on the downside 5,250 and then 5,100 would act as support.

The FY13 budget, about which there no expectations this time around, has been a failure and a great opportunity to introduce much needed reforms has been missed.

The author is founder of KRIS, an investment advisory firm. The views expressed are his own

BRIEFLY

Re up on gold duty hike, ECBs move
Mumbai: The rupee pared early losses to end the week 20 paise up against the dollar as the budget proposals to allow overseas borrowings for more sectors and doubling gold import duty boosted sentiment. — PTI