Budget 07 by 007
Good Economics works well for everybody. Well I am ready to buy this from the FM.Although his 6th Budget left a many disappointed from whatever little I know about the economy I am mighty pleased. Well I would chart my arguments which bring me to this conclusion. So here they go…
1. DDT for corporate increased from 22.5% to 25% and for individuals from 12.5% to 25%.Well keeping the India Inc. case first they were expecting that DDT will be reduced to 20%.Well personally I don’t see any rational behind this because whatever dividend the companies distributes to its shareholders is subject to the surplus that the company is left with ,which in turn depends whether the growth can be sustained on the revenue front. In this case the companies before distributing the dividends will discount the tax amount, thus reducing the amount that is paid to the shareholder. In turn the excess generated through this would be spent on improving the social as well as physical infrastructure of the country, which in turn benefits the common man. And honestly speaking me being an investor myself I depend rather on the appreciation of the share value rather than the company distributing dividend. So do you see anyone losing here. On the contrary this is a Win All situation!
2. Additional 1% education cess.This will be generating excess of around Rs.5000 crore.Now its been a while that corporates have been crying foul regarding the talent crunch. Companies are ready to recruit even at a premium. So there is a clear need for the Govt. to improve the education structure and that is where this cess will be directed towards, improving secondary and higher education. That means now the Govt. will be in a position to allot more funds to IITs and IIMs to fund their expansion plans in order to compensate for the reservation directive. As the name itself suggests that it will be mandatory for the Govt. to spend it on anything else but education. India Inc. has been undertaking this Campus tie up programme with the colleges to train graduates. So if this were to be done by the Govt. itself then I needn’t say who is going to be benefited? Also the commitment of the FM towards the education sector can be substantiated by the fact that there has been an increased allocation of around Rs.600 crore for the Sarva Shiksha Abhiyaan to Rs.10620 crore.
3.IT companies will have to pay MAT i.e. Minimum Alternate Tax of around 1.5% on their revenues. They complain that it is virtually the end of their tax holiday what with the STPI (Software Technology Parks of India)sunset clause set to expire in 2009.Well as has been rightly pointed out by the face of IT industry Mr. Narayan Murthy it just doesn’t makes any sense when bigger IT companies don’t pay taxes in India but pay taxes all over the world. The commitment of the Govt. towards this sector can be very well seen by the fact that e-governance allocation has been increased from around Rs.395 crore to Rs.719 crore.Also as the SEZ policy has not been touched what it means is that the IT companies if they decide to move to the SEZs won’t attract any tax as of now. We forget to remember that the Govt. just can’t afford to kill the hen that continues to lay golden eggs.
4. Bringing the ESOPs under the FBT is again a move which will ensure that Indian tax structure moves towards the global tax structure. India is the only country where ESOPs don’t attract FBT, although in countries like Australia, New Zealandand other European countries this has been a followed practice. However the corporates argues that they follow these ESOPs to help them retain employees for longer period of time. Well as of now it has been pretty clear looking at the attrition pattern that employees won’t stay with the company just to exercise this option. Also it has not been clear that whether the FBT will be the differential between the amount paid by the employee and the price on the date of grant of ESOPs or whether it will be taxable at the time of exercising the option. And the most important argument that validates this tax is the clause under which FBT was defined which inter alia means any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees, any contribution of the employer to an approved superannuation fund for the employees. It doesn’t need a rocket scientist to understand that ESOPs surely falls under this ambit.
5. The differential duty structure for the cement companies is also a move in the right direction. As the cement prices have increased by an alarming 50% over the past year, this pose a huge threat to the infrastructure sector, where cement forms 13-20% input cost. Also by introducing a differential duty structure the FM has left this to the discretion of individual cement companies whether they intend to bear the additional burden on Rs.200 per tonne or they intend to pass this to the consumer, where in this case the prices of cement will rise by Rs.12/- per bag. And in case some of the companies decide to bear the burden, the other will be conceding an edge to these companies, which in turn may affect the sales.
Now a few landmark steps which the FM took, although they failed to catch the eye,
1. Formation of IIFC (India Infrastructure Firm) which will borrow money from RBI and lend it to the infrastructure companies. Also the money from the National Small Savings Fund which holds money raised through post office savings scheme will be available for infrastructure. What this means is no shortage of funds for the Infrastructure sector as the RBI currently has forex reserves to the tune of $190 bn.
2. Introduction of EBs (Exchange Bonds),which allow companies to raise capital by unlocking value in their strategic holdings in other companies. This means one can sell the shares in a company at a premium to the CMP (Current Market Price) and still has the right to vote against these issued shares unless they are not exercised by the buyer. This also provides an additional route to India Inc. to raise money, bearing in mind the kind of multi billion dollar deals that are being struck.
3. Deliver based short selling allowed for FIs which means they can take a call on both sides of the market which brings in more transparency to the system and also reduces the element of volatility in a falling market.
4.The reduction of CST by 1% means that we are moving towards this desired GST goal we set for ourselves by 2010.It reduces the overall tax for India Inc.and specially for the auto sector it means reduction in the logistics cost.
5.Most importantly ,exceeding the FRBM targets both on the fiscal deficit and the revenue deficit front as for the former reducing to 3.7% of GDP against an estimated 3.8% and the later to 2% against an estimated target of 2.2%.These are huge figures considering the size of the Indian economy and commitment to the fiscal and revenue targets propels the country to higher investment grade by the agencies all over the world.
Well for those who are worrying about the Stock market crash there are many reasons which I state here:
1. China’s markets were down by nearly 10% the day before owing to tightening of regulations for the companies listed on the bourses.
2. DJIA saw its worst fall of nearly 4% driven by weak investor sentiment and poor economic data of the US economy.
3. As for the irrationality of the Indian stock markets I would explain this with an example: Take Mahindra & Mahindra.From what was announced in the Budget it was positive for M&M as the rural focus will benefit M&M’s tractors and vehicle financing business. Its defense trucks unit will gain from higher defence outlay’s cut will reduce the logistics cost. So after going through all this its thumbs up for M&M.But what we see is the M&M scrip fell by almost 5% to close at that price.
I’m not of the view that the markets don’t go in sync with what the FM thinks is right but these are mainly knee jerk reactions as the markets were expecting some dole out packages from the FM and instead this year’s Budget turned out to be an non event instead of a curtain raiser. So I would end this segment with what the Nobel laureate Mohd. Yunus had to say “Faster growth is essential to faster reduction of poverty. There is no other trick to it”.
And as all the economic indicators suggest we are on the path to attain and even exceed the high growth of 9.2% for the coming year. After all good economics is always good politics.
1. DDT for corporate increased from 22.5% to 25% and for individuals from 12.5% to 25%.Well keeping the India Inc. case first they were expecting that DDT will be reduced to 20%.Well personally I don’t see any rational behind this because whatever dividend the companies distributes to its shareholders is subject to the surplus that the company is left with ,which in turn depends whether the growth can be sustained on the revenue front. In this case the companies before distributing the dividends will discount the tax amount, thus reducing the amount that is paid to the shareholder. In turn the excess generated through this would be spent on improving the social as well as physical infrastructure of the country, which in turn benefits the common man. And honestly speaking me being an investor myself I depend rather on the appreciation of the share value rather than the company distributing dividend. So do you see anyone losing here. On the contrary this is a Win All situation!
2. Additional 1% education cess.This will be generating excess of around Rs.5000 crore.Now its been a while that corporates have been crying foul regarding the talent crunch. Companies are ready to recruit even at a premium. So there is a clear need for the Govt. to improve the education structure and that is where this cess will be directed towards, improving secondary and higher education. That means now the Govt. will be in a position to allot more funds to IITs and IIMs to fund their expansion plans in order to compensate for the reservation directive. As the name itself suggests that it will be mandatory for the Govt. to spend it on anything else but education. India Inc. has been undertaking this Campus tie up programme with the colleges to train graduates. So if this were to be done by the Govt. itself then I needn’t say who is going to be benefited? Also the commitment of the FM towards the education sector can be substantiated by the fact that there has been an increased allocation of around Rs.600 crore for the Sarva Shiksha Abhiyaan to Rs.10620 crore.
3.IT companies will have to pay MAT i.e. Minimum Alternate Tax of around 1.5% on their revenues. They complain that it is virtually the end of their tax holiday what with the STPI (Software Technology Parks of India)sunset clause set to expire in 2009.Well as has been rightly pointed out by the face of IT industry Mr. Narayan Murthy it just doesn’t makes any sense when bigger IT companies don’t pay taxes in India but pay taxes all over the world. The commitment of the Govt. towards this sector can be very well seen by the fact that e-governance allocation has been increased from around Rs.395 crore to Rs.719 crore.Also as the SEZ policy has not been touched what it means is that the IT companies if they decide to move to the SEZs won’t attract any tax as of now. We forget to remember that the Govt. just can’t afford to kill the hen that continues to lay golden eggs.
4. Bringing the ESOPs under the FBT is again a move which will ensure that Indian tax structure moves towards the global tax structure. India is the only country where ESOPs don’t attract FBT, although in countries like Australia, New Zealandand other European countries this has been a followed practice. However the corporates argues that they follow these ESOPs to help them retain employees for longer period of time. Well as of now it has been pretty clear looking at the attrition pattern that employees won’t stay with the company just to exercise this option. Also it has not been clear that whether the FBT will be the differential between the amount paid by the employee and the price on the date of grant of ESOPs or whether it will be taxable at the time of exercising the option. And the most important argument that validates this tax is the clause under which FBT was defined which inter alia means any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees, any contribution of the employer to an approved superannuation fund for the employees. It doesn’t need a rocket scientist to understand that ESOPs surely falls under this ambit.
5. The differential duty structure for the cement companies is also a move in the right direction. As the cement prices have increased by an alarming 50% over the past year, this pose a huge threat to the infrastructure sector, where cement forms 13-20% input cost. Also by introducing a differential duty structure the FM has left this to the discretion of individual cement companies whether they intend to bear the additional burden on Rs.200 per tonne or they intend to pass this to the consumer, where in this case the prices of cement will rise by Rs.12/- per bag. And in case some of the companies decide to bear the burden, the other will be conceding an edge to these companies, which in turn may affect the sales.
Now a few landmark steps which the FM took, although they failed to catch the eye,
1. Formation of IIFC (India Infrastructure Firm) which will borrow money from RBI and lend it to the infrastructure companies. Also the money from the National Small Savings Fund which holds money raised through post office savings scheme will be available for infrastructure. What this means is no shortage of funds for the Infrastructure sector as the RBI currently has forex reserves to the tune of $190 bn.
2. Introduction of EBs (Exchange Bonds),which allow companies to raise capital by unlocking value in their strategic holdings in other companies. This means one can sell the shares in a company at a premium to the CMP (Current Market Price) and still has the right to vote against these issued shares unless they are not exercised by the buyer. This also provides an additional route to India Inc. to raise money, bearing in mind the kind of multi billion dollar deals that are being struck.
3. Deliver based short selling allowed for FIs which means they can take a call on both sides of the market which brings in more transparency to the system and also reduces the element of volatility in a falling market.
4.The reduction of CST by 1% means that we are moving towards this desired GST goal we set for ourselves by 2010.It reduces the overall tax for India Inc.and specially for the auto sector it means reduction in the logistics cost.
5.Most importantly ,exceeding the FRBM targets both on the fiscal deficit and the revenue deficit front as for the former reducing to 3.7% of GDP against an estimated 3.8% and the later to 2% against an estimated target of 2.2%.These are huge figures considering the size of the Indian economy and commitment to the fiscal and revenue targets propels the country to higher investment grade by the agencies all over the world.
Well for those who are worrying about the Stock market crash there are many reasons which I state here:
1. China’s markets were down by nearly 10% the day before owing to tightening of regulations for the companies listed on the bourses.
2. DJIA saw its worst fall of nearly 4% driven by weak investor sentiment and poor economic data of the US economy.
3. As for the irrationality of the Indian stock markets I would explain this with an example: Take Mahindra & Mahindra.From what was announced in the Budget it was positive for M&M as the rural focus will benefit M&M’s tractors and vehicle financing business. Its defense trucks unit will gain from higher defence outlay’s cut will reduce the logistics cost. So after going through all this its thumbs up for M&M.But what we see is the M&M scrip fell by almost 5% to close at that price.
I’m not of the view that the markets don’t go in sync with what the FM thinks is right but these are mainly knee jerk reactions as the markets were expecting some dole out packages from the FM and instead this year’s Budget turned out to be an non event instead of a curtain raiser. So I would end this segment with what the Nobel laureate Mohd. Yunus had to say “Faster growth is essential to faster reduction of poverty. There is no other trick to it”.
And as all the economic indicators suggest we are on the path to attain and even exceed the high growth of 9.2% for the coming year. After all good economics is always good politics.
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