Can Budget 2015-16 Do Much to Boost Savings? - Outside View

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Can Budget 2015-16 Do Much to Boost Savings?
Feb 26, 2015

Even after a long wait of almost a year, aam aadmi has not got any anything significant from the Modi-led-NDA Government that was promised during election campaigns. Although inflation may have mellowed down, life essentials such as vegetables, milk, fruits and other food articles are still dearer. Despite weaker demand, real estate prices haven't come down meaningfully making housing still a distant dream for the common man. Education facilities are yet to get better and uninterrupted availability of electricity even in remote areas of India is likely to take a good deal of time. Although it would be too much to ask for to fulfil all these in a short while, the least  aam aadmi expects is changes in key areas are the basics.

The forthcoming budget would be a good indicator of knowing how serious the Government is about speeding up reforms and promoting economic growth.  The most significant aspect of speeding reforms is to pull-out all the blockages to develop infrastructure. Under the Make in India programme, 25 manufacturing sectors have been identified to step-up exports and eventually to increase the contribution of manufacturing in India's GDP along with generating employment.

But to achieve the aforesaid objectives, first, the Government has to make sure that, there is more money left in hands of individuals as well as with companies. More money with individuals means people may save as well as spend more. This in turn will help companies to improve their balance sheets, leaving more scope for investment revival.

Given that there is little scope for the Government to do something radical considering stringent fiscal deficit targets and limited resources to shore up Government finances significantly, the Government would have to strike a perfect balance. The Government is expected to significantly revamp personal income tax and corporate tax structure, which in effect leave more money in the hands of individuals and companies. 

What may change for individuals?

The Income Tax exemption limit may be revised: There is an expectation the income tax base exemption limit may be revised from current Rs 2.5 lakh to Rs 3.0 lakh. Such expectation has ensued after the Modi-led-NDA Government increased the base exemption by Rs 50,000 in its first budget presented in July 2014. If the Government honours this expectation, it would lead to higher disposable income in the hands of individuals and thus lead to higher demand and investments in the economy.

But given the commitment to walk tight on the path of fiscal consolidation, it appears unlikely that the Government would honour this; but strike a figure somewhere in between, rather than increase the base exemption limit by once again by another Rs 50,000.    Furthermore, there is a demand that 30% tax slab should be applicable only to those drawing income of more than Rs 20 lakh in case of individual assessees. Although this too seems unlikely, reshuffling of tax slabs, to make them favourable cannot be ruled out.  There has also been a clamour that standard deduction available to salaried employees should be reintroduced; but PersonalFN believes it is unlikely to be reintroduced in this budget.

More Deductions and Exemptions: If the basic tax exemption limit is raised, permissible deduction under Section 80C may also go up. Likewise it is expected that deduction under Section 80CCF for investments in infrastructure bonds be reinstated and this time possibly with a higher deduction limit of upto Rs 50,000 as against the previous Rs 20,000. Similarly, increasing the exemption limit for conveyance allowance, education allowance and hostel allowance as these limits were set several years ago.

Also as medical costs have gone up manifold over the last few years, there is an expectation that this limit be raised to Rs 50,000 in the budget 2015-16, much in line with the proposed DTC.

What may change for Companies?

Predictability and roadmap to tax rationalisation...

Corporates are expecting simplification of tax structure. The Government has also hinted at making corporate taxes more industry centric in order to incentivise them towards capacity additions. The industry least expects negative surprises such as retrospective taxes. On the contrary, there have been demands to lower corporate tax rates.

The Industry would like to seek more clarity on implementation of Goods and Services Tax (GST). Moreover, corporates expect lowering of Minimum Alternate Tax (MAT) too. Besides the sector specific incentives, corporate houses are hoping that dispute-settlement mechanism improves and there's more clarity on tax treatment for Real Estate Investment Trusts (REITs) and alternate investment funds.

PersonalFN is of the view that while the Government may attempt to appease all sections, the focus would be on promoting economic growth. The Modi-led-NDA Government has decided to achieve the fiscal deficit target (set by the predecessor) of 4.1% of GDP for the fiscal year 2014-15 and reduce it further to 3.6% in fiscal year 2015-16, followed by 3.0% in 2016-17. Given the tight state of public finances it remains to be seen the magnitude in which the Government can increase the disposable income, while there are heightened expectations of acche din. Nevertheless to provide a fillip to economic growth and attract investments in India, the Government can certainly focus on making tax environment in India rationalised and more predictable.

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