Intelligentguess

The Indian Finance Minister presented the annual budget in Parliament today.

Key decisions concerning direct taxes are elucidated below (alongwith some brief comments)

Threshold limit of exemption in the case of all assessees to be increased by Rs.10,000.

• In the case of a woman assessee, threshold limit to be increased from Rs.135,000 to Rs.145,000
• In case of a senior citizen from Rs.185,000 to Rs.195,000

This gives a relief of Rs. 1000 (Rs. 2000 in case of senior citizens) in tax payments. Too miniscule to be of much import.

Surcharge on income tax on all firms and companies with a taxable income of Rs.1 crore or less to be removed.

The surcharge is at a rate of 10%. This would thus benefit companies which qualify as per the eligibility norm.

A five year income tax holiday for two, three or four star hotels and for convention centres with a seating capacity of not less than 3,000; they should be completed and begin operations in National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during April 1, 2007 to March 31, 2010.

This move is intended to incentivise creation of hotel rooms in Delhi and surroundings. Clearly targeted at the Commonwealth games due to be held in Delhi in 2010.

Tax holiday to undertakings in Jammu & Kashmir to be extended for another five years up to March 31, 2012.

The minister could have as well said “indefinitely” instead of specifying the terminal date.

Minimum Alternate Tax (MAT) to be extended to income in respect of which deduction is claimed under sections 10A and 10B.

Secs 10A and 10B deal with profits earned from units located in Special Economic Zones. Perceived to be a negative for small and medium IT companies.

Deduction under section 36(1)(viii) to be restricted to 20% of profits each year.

Section 36 allows deduction for transfer of profits to special reserve upto 40% for banks/ FIs engaged in long term finance. The proposal to reduce it to 20% increases the effective tax rate by approximately 5%. Negative for entities like IDFC, HDFC etc.

Pass-through status to be granted to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development;nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels, and hotel-cum-convention centres of a certain description and size.

An unnecessary attempt at micro management by the Finance Minister

Rate of dividend distribution tax to be raised from 12.5% to 15% on dividends distributed by companies; and to 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors.

Negative for investors in company shares. Effective tax on dividend distribution by “liquid” mutual funds to individuals more than doubles to 28.3% from the current 14.02%. Increase in effective tax rates for corporates investing in “liquid” mutual funds increases by approximately 5.5%.

ESOPs to be brought under Fringe Benefit Tax regime.

A big negative for all those who dream of riches from ESOPs. The government now eyes a share of the pie

Cash withdrawals by Central and State Governments to be excluded from the scope of Banking Cash Transactions Tax (BCTT); exemption limit for individuals and HUFs to be raised from Rs.25,000 to Rs.50,000

Better late than never. BCTT is anyway a controversial measure. Raised a lot of hackles when introduced. Personally, would prefer that this tax be withdrawn.

An additional cess of 1% on all taxes to be levied to fund secondary education and higher education and the expansion of capacity by 54% for reservation for socially and educationally backward classes.

Education cess has been hiked from 2% to 3%. This move is distinctly unpopular. It leads to a cascade increase in all taxes.

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Indian Finance Minister, P Chidambaram presents the annual budget in Parliament at 0530 hrs GMT (1100 hrs IST) on Wednesday, Feb 28.

The event, significant to Indian markets in itself, comes in the backdrop of a global stock market meltdown on Tuesday.

It all started with the Chinese stock market benchmark, the Shanghai composite index posting its biggest single day loss of almost 9% since February 1997. On that occasion the index had dropped 9.14% on the death of the Chinese reformist leader Deng Xiaoping.

Incidentally, the Chinese index has gained more than 130% in 2006 and also touched its all time high on Monday. The triggerfor the sharp fall this time around, however, is more rooted in reality than sentiment. Tuesday’s decline on the Chinese market was triggered by fears that the government would intervene to slow down the market.

Amongst other markets, the US Dow Industrials is down by about 190 points (1.5% approx), the NASDAQ composite is down more than 2.4% and the S&P 500 is down more than 1.75% (as I write this).

Brazil’s benchmark is down by about 4%, and the major European European indices have closed as below

London FTSE : 6286.10; -148.60; -2.31%

Paris CAC 40 : 5588.39 ; -174.15 ; -3.01%

German DAX : 6819.65 ; -207.94; -2.96%

Bond yields in major markets continue to rule low as investors take flight to safety. All major currencies have rallied against the US dollar with the Japanese Yen rising the most (an almost 1.60% gain over the previous day, as i write). It now trades at approximately 118.60 to the US dollar.

The attempted terrorist attacks, against US Vice President Dick Cheney in Kabul and the US and Italian Ambassadors in Sri Lanka, have also worsened sentiment.

While other Asian markets will open before the Indian markets and provide cues on the global market mood, investors should brace themselves for a rough ride when markets open on budget day.

As it is, the ruling party has suffered losses in two of the states that it ruled. With the key state of Uttar Pradesh due for elections in April-May, brace yourself for a populist budget. Not so good news for the stock markets though.

Update : The Dow has fallen by more than 2% while the NASDAQ fall breached 3%. The sharp fall in the New York Stock Exchanges Composite Index has also trigerred the circuit breaker (collar) mechanism of the exchange after a long time - first time since June 2006. Things are looking really gloomy.

Update 2 : It’s actually worse than expected. The Dow lost more than 400 points at close, after having suffered a close to 550 point loss (attributed to a technical glitch) mid session.  Asian markets have also opened weak. The Japanese and Hong Kong benchmarks are down more than 3% mid morning. Worse, emerging markets actually lost ground even more sharply. Brazil, Mexico, Argentina all closed down by more than 6%. Phillipines is trading down more than 6% mid morning. Expecct a sharp 2-3% loss in the Bombay Sensex within the first hour of trade. 

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