Knowledge Quotient

Budget 2009-2010: Another populist budget
July 6, 2009

The budget presented a few hours back by Finance Minister Pranab Mukherjee was a populist budget focused on poor with increased expenditure in most of the social sector schemes. It emphasized on leading growth back to 9% and the need to continue with “further fiscal stimulus”.

There was also significant importance given to infrastructure sector. Govt will increase infra spending to over 9% of GDP by 2014. Allocation to NHAI has been increased by 23% to Rs86bn. Also allocation to JNNURM and APDRP (power T&D) increased by 88% and 160% respectively. IIFCL to be given greater flexibility and will refinance up to 60% of bank loans to PPP projects. Investment of Rs1 trillion to be refinanced by IIFCL.

On the tax side, there was no change in corporate taxes, while the government opted to increase the tax exemption limit for the personal sector. Surcharge tax of 10% on personal income-tax was eliminated. Fringe Benefit Tax and Commodity Transaction Tax were abolished.

But the populist budget was not so popular if we go by the market reaction. Higher fiscal deficit and higher borrowing along with absence of any expected structural economic reforms impacted the market negatively.

What spooked the market?

No economic reforms announced. Fuel policy was not detailed in the budget.
Increase in FDI limits in several sectors not mentioned.
Fiscal deficit too high for comfort.
Minimum Alternate Tax (MAT) increased to 15% of book profits from 10%.

Some positive points:

There was no reversal of any of the fiscal stimuli announced earlier. Government seems to be seriously concerned about growth. (negative from fiscal deficit point of view)
Increased rural and agricultural spending and NREGA outlay is positive for rural economy and will keep rural demand high.
Increased income tax slab, elimination of surcharge tax to boost consumption.
Most of the structural reforms are actually outside the scope of the budget and need parliamentary approval and so it is not actually necessary to mention these in budget.
Finance Minister has been conservative in keeping the disinvestment amount the same as in interim budget. If there are any revenue inflows through disinvestment, it will be a positive surprise for the market.

Fiscal Deficit for FY10 at 6.8% of GDP compared to 5.5% of GDP in interim budget
Fiscal deficit increased due to increased expenditure and also decline in projected GDP growth.

The total revenue expenditure increased by Rs 49,147 cr above the interim budget while the capital expenditure increased by only Rs 18,460 cr.
Compared to last fiscal, expenditure increased by 13.3% and revenues increased by 9.3%. Increasing expenditure is due to increased spending by the Govt on various social sectors schemes. Most of the expenditure will be on roads, irrigation and power as well as a 144% rise in spending on the rural employment guarantee scheme, an increased allocation of nearly INR40bn for urban housing.
Interest payments estimated at Rs.2,25,511 crore constituting about 36% of Non-plan revenue expenditure in B.E. 2009-10.

GDP for FY10BE has been projected at 10.05% growth over FY09RE instead of 11%.

2008-2009 RE 2009-2010 Interim 2009-2010 BE
		budget Estimates (Rs Cr)			Diff bet Interim and budgeted (Rs Cr)	%yoy growth over FY09
1	Revenue Receipts	562,173	609,551	614,497	4,946	9,3%
2	Tax Revenue (net to Centre)	465,970	497,596	474.218	-23,378	1,8%
3	Non-tax Revenue	96,203	111,955	140.279	28,324	45.80%
4	Capital Receipts (546+7)	338,780	343,680	406.341	62,661	19.90%
5	Recoveries of Loans	9,698	9,725	4.225	-5,500	-56.40%
6	Other Receipts	2,567	1,120	1.12	0	-56.4%
7	Borrowings and other Liabilities	326,515	332,835	400.996	68,161	22.8%
8	Total Receipts (1+4)	900,953	953.231	1.020.838	67,607	13,3%
9	Non-plan Expenditure	617,996	668,082	695.689	27,607	12.60%
10	On Revenue Account of which	561,790	599,736	618.834	19,098	10.20%
11	Interest Payments	192,694	225,511	225.511	0	17,0%
12	On Capital Account	56,206	68,346	76.855	8,509	36.70%
13	Plan Expenditure	282,957	285,149	325.149	40,000	14.90%
14	On Revenue Account	241,656	248,349	278.398	30,049	15,2%
15	On Capital Account	41,301	36,800	46.751	9,951	13.20%
16	Total Expenditure (9+13)	900.953	953.231	1.020.838	67,607	13.30%
17	Revenue Expenditure (10+14)	3,446	848,085	897.232	49,147	11.70%
18	Capital Expenditure (12+15)	97,507	105,146	123.606	18,460	26.80%
19	Revenue Deficit (17-1)	241,273	238,534	282.735	44,201	17.20%
	% of GDP	-4,4	-4	4.8	-0.8	0,4%
20	Fiscal Deficit {16-(1+5+6)}	326,515	332,835	400.996	68,161	22.80%
	Fiscal Deficit % of GDP	-6	-5.5	-6.8	-1.3	0.80%
22	Primary Deficit (20-11)	133,821	107,324	175.485	68,161	31,1%
	% of GDP	-2.5	-1.8	3	-1 2	0.50%

The off-budget expenditure in this budget is much less compared to previous fiscal year. For FY10, oil bonds amounting to Rs 10,306 cr compared to Rs 75,942 cr in FY09.

Net and gross market borrowings are much more than our estimation

The total revenue expenditure increased by Rs 49,147 cr above the interim budget while the capital expenditure increased by only Rs 18,460 cr.
- Increased expenditure and also
- Recovery of loans and other items of capital receipts have been reduced from the interim budget estimate.
Increased borrowing of Rs 89,310 cr for FY10 will be raised from the market. Govt has already borrowed an additional Rs 46,000 cr in 1QFY10 than proposed for that quarter.
The market expects that the additional borrowing will be supported by RBI through additional OMO purchase.

Revised Budget Interim Budget Revised Budget Diff
		2008-2009	2008-2009	2008-2009	2009-10
1	Internal Debt-Market Borrowings	261.972	308,647	397,957	89,310
	1.01 Gross Market Borrowings	306.000	361,782	451.093	89,311
	1.02 Less - Repayments	44,028	53,135	53,135	0
2	Recovery of Loans	9,698	9,725	4,225	-5,500
3	Other items of Capital receipts	18,833	-10,115	-31,264	-21,149
4	Others	18,293	35,423	35,423	0

The views on Budget 2009 expressed herein are the personal views of the Economist. The information herein constitutes only the opinions and do not constitute any guidelines or recommendation on the course of the action to be followed. Readers are advised to seek independent professional advice and verify the contents before making any investment decision. The information contained herein has been obtained from sources published by third parties, publicly available information, internally developed data and other sources believed to be reliable. While such publications are believed to be reliable and we have made best efforts to avoid any errors or omissions, however, neither the AMC, the Trustees, the Fund nor any of their affiliates, employees, directors or representatives assume any responsibility for the accuracy, completeness, adequacy and reliability of such information nor shall they be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations.

Sponsor: Reliance Capital Limited Trustee: Reliance Capital Trustee Co. Limited Investment Manager: Reliance Capital Asset Management Limited Statutory Details: The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956. Risk Factors: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the Schemes objectives will be achieved. As with investments in any securities, the NAVs of the units issued under the Schemes can go up or down depending on the factors and forces affecting the securities market. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of future performance of the Scheme. The Sponsor is not responsible or liable for any loss resulting from the operation of the Schemes beyond their initial contribution of Rs.1 Lac made towards the setting up of the Mutual Fund and such other accretions and additions to the corpus. Please read the Scheme Information Documents & Statement of Additional Information carefully before investing.

In the Wonderland of Investments
Budget 2009: Key Highlights

Marginal relaxation in income tax slabs
The basic exemption limit has been increased by Rs. 10,000 for men and women and by Rs. 15,000 for senior citizens. This would translate into a tax benefit for Rs. 1,000 for non-senior citizens and Rs. 1,500 for senior citizens respectively.

Surcharge on income tax abolished
Simultaneously, the 10% surcharge has been discontinued for all categories of taxpayers except for corporate. Since for individuals, surcharge was only applicable to income above Rs. 10 lakh, this move will essentially benefit only the higher income group. The highest tax rate will drop down from 33.99% to 30.9%. The 3% education cess stays put for all taxpayers.

Table1

Taxpayer category	For FY 08-09	As proposed by Budget 2009 for FY 09-10	Tax benefit
Men	Rs. 1,50,000	Rs. 1,60,000	Rs. 1,000
Women	Rs. 1,80,000	Rs. 1,90,000	Rs. 1,000
Senior Citizens	Rs. 2,25,000	Rs. 2,40,000	Rs. 1,500

Table 2: Impact of Budget provisions on income marginally above Rs. 10 lakh

Category	Previous tax payable	As per Budget	Difference
Men	Rs. 2,25,5000	Rs. 2,04,000	Rs. 21,500
Female	Rs. 2,22,200	Rs. 2,01,000	Rs. 21,200
Senior Citizen	Rs. 2,17,250	Rs. 1,96,000	Rs. 21,250

Scope of Sec. 80E deduction extended
Section 80E provides for a deduction in respect of interest paid on loan taken for the purpose of pursuing full time graduate or post graduate studies in specified fields. Now the scope of this deduction has been extended to cover all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central or State Government.

Deduction for medical treatment of a dependent suffering from disability
Section 80DD offers a deduction in respect of expenditure for the medical treatment of a dependant with disability. The present limit for deduction is Rs.50, 000 if the dependant is suffering from disability and Rs.75, 000 if the dependant is suffering from severe disability.

The Budget proposes to increase the limit for severe disability to Rs.1 lakh. However, the limit for ordinary disability is proposed to be retained at the existing level of Rs.50, 000.

Enhancement of the limit for payment of advance tax
Advance tax needs to be paid if the tax payable for any financial year is Rs. 5,000 or more. This limit is being doubled to Rs. 10,000

Enhancement of the limit for payment of wealth tax
Currently wealth tax is charged @1% in the net wealth exceeds Rs. 15 lakh. This limit too is being doubled to Rs. 30 lakh.

Fringe Benefit Tax no longer applicable
In a significant move that will bring immense cheer to corporates, the much disliked Fringe Benefit Tax (FBT) has been abolished. However, the cheer ought to be short lived for the Budget simultaneously proposes to restore the taxation of fringe benefits as perquisites in the hands of employees. In short, an employer based tax system is being brought back to employee based taxation.

For example, immediately after the budget speech, a section of the media had hailed this move as Employee Stock Options (ESOPs) will no longer be subject to FBT. But perhaps what was not being considered was that these ESOPs will be subject to perquisite tax in the hands of the employees. The perk tax will be the difference between the Fair Market Value (FMV) of the shares on the date of exercise of the options less the exercise price. The story does not end here. Upon sale, capital gains tax will also be payable. Capital gains will be calculated on the difference between the sale price of the shares as reduced by the aforementioned FMV.

This move while benefiting employers (read corporate) will adversely affect employees. While it was true that FBT was anyway being passed on to employees, the effective FBT tax rate in most cases was 6.8 %. Now, these very FBT items will be added to the employee’s income as perks and subject to slab rates. So in all probability, instead of having to bear a tax of 6.8%, the employee would be paying a tax of 30.9%.

Tax benefits for New Pension System
The New Pension System (NPS) earlier applicable only to government employees has been opened up to all citizens of India since the 1st of May, 2009. Contributions to NPS attract tax benefits under Sec. 80CCD. This deduction was hitherto available to “employees” only. However, Budget 2009 has amended Sec. 80CCD so as to extend the tax benefit there under also to “self-employed” individuals.

A significant point of note here is that there is a limit of 10% of salary on the amount of Sec. 80CCD deduction for employees. Since there is no mention of any similar limit for non-employees, it may be inferred that for this category the overall limit of Rs. 1 lakh will be applicable.

Lastly, there would be no TDS on income flowing from NPS.

Sec. 56: Scope of gift tax extended
Readers may know that as per Sec. 56, any sum above Rs. 50,000 in the aggregate received from non-relatives was taxable as income of the recipient. Since these provisions were applicable to ‘a sum of money’, hitherto, non-cash gifts used to escape this gift tax net. Budget 2009 has effectively plugged this loophole.

Now, the value of any non cash property such as land or building, shares and securities, jewellery, drawings, paintings, sculptures or any works of art etc. transferred without consideration will be subject to income tax in the hands of the recipient.

For immovable property the stamp duty valuation will be considered whereas for movable property, the fair market value on the date of the gift will be considered for arriving at the assessable value. Additional incentive for quoting PAN for TDS
The government finds that non-quoting of PANs by deductees is creating problems in the processing of income tax returns as also for granting credit for TDS. In order to strengthen the PAN mechanism, it is proposed that any person, whose receipts are subject to TDS i.e. the deductee, shall have to mandatorily furnish his PAN to the deductor failing which the deductor shall deduct tax at source at the rate applicable or 20% whichever is higher.
,br> This would also be applicable for those who file forms 15G or 15H. Forms 15G and 15H are filed by investors requesting the institution concerned not to deduct tax at source. What this means is that if these forms are filed without quoting PAN, TDS will be deducted and that too at the rate of at least 20%.

To Conclude
These were the key proposals of Budget 2009. There was absolutely no action taken regarding big ticket items such as disinvestment, fuel policy, FDI, the high fiscal deficit etc. Significantly, the Finance Minister in his budget speech announced that a new Direct Tax Code will replace the current Income Tax Act and the same is going to be introduced within 45 days. One can’t help but get the feeling that the tinkering and fixing exercise that Budget 2009 eventually turned into is a precursor to the new Tax Code. Watch this space for updates.

The views on Budget 2009 expressed herein are the personal views of the Financial Advisor. The information herein constitutes only the opinions and do not constitute any guidelines or recommendation on the course of the action to be followed. Readers are advised to seek independent professional advice and verify the contents before making any investment decision. The information contained herein has been obtained from sources published by third parties. While such publications are believed to be reliable and we have made best efforts to avoid any errors or omissions, however, neither the AMC, the Trustees, the Fund nor any of their affiliates, employees, directors or representatives assume any responsibility for the accuracy, completeness, adequacy and reliability of such information nor shall they be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. This information is not intended to be an offer or solicitation for the purchase or sale of any financial product or instrument. Recipients of this information should rely on information/data arising out of their own investigations.

Sponsor: Reliance Capital Limited Trustee: Reliance Capital Trustee Co. Limited Investment Manager: Reliance Capital Asset Management Limited Statutory Details: The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956. Risk Factors: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the Schemes objectives will be achieved. As with investments in any securities, the NAVs of the units issued under the Schemes can go up or down depending on the factors and forces affecting the securities market. Past performance of the Sponsor/AMC/Mutual Fund is not indicative of future performance of the Scheme. The Sponsor is not responsible or liable for any loss resulting from the operation of the Schemes beyond their initial contribution of Rs.1 Lac made towards the setting up of the Mutual Fund and such other accretions and additions to the corpus. Please read the Scheme Information Documents & Statement of Additional Information carefully before investing.