Budget 2014: Give Indians tax breaks, more ways to invest – experts
Arun Jaitley’s first budget as India’s finance minister should allow individual taxpayers to invest more money in vehicles such as government savings bonds, mutual funds and employee savings plans, and provide them with tax credits that would bolster their savings and boost economic growth, tax experts say.
Income tax rules allow for an annual exemption of 100,000 rupees ($1,700) in investments and expenditures such as life insurance and home loan repayments, a rule that has remained unchanged for about a decade. Such investments, along with public provident funds, employee provident funds, five-year term deposits in banks and equity-linked mutual fund savings plans are good for individuals and also help keep the economy on a strong footing, said Suresh Surana, founder, RSM Astute Consulting.
“Savings need to be channelized into economically productive avenues which are what Section 80C essentially provides for, investment either in government securities or bank deposits or life insurance,” said Surana.
These comments come as the Bharatiya Janata Party, which won parliamentary elections and installed Narendra Modi as prime minister in May, releases its first annual budget for the country on July 10.
India’s gross domestic savings dipped to 30.8 percent in 2011-12 from 36.8 percent in 2007-08 with investors increasingly preferring gold and real estate to equities and mutual funds because they see them as more profitable, inflation-hedging investments than financial vehicles such as the equity market, according to Surana.
Raising the 100,000 rupee limit and expanding the number of ways to invest it in exchange for a tax credit would help people save more money and invest it in ways that benefit the economy, even if it were to hit government revenue, experts said.
“It’s [the government’s] job is to bring about growth and development. Let us say some tax revenues are forgone … That decline can be more than offset by growth and development in other sectors where India desperately needs money. Infrastructure could be one, the second could be agriculture for example,” said Homi Mistry, Partner, Deloitte Haskins & Sells LLP.
As seen in previous budgets unveiled by the former Congress party alliance, there is also a demand for raising the threshold exemption limit for income tax from the current 200,000 rupees ($3,300).
Consumer price-based inflation rose to 10.9 percent in 2013 from 8.9 percent in 2011 while rising food, gas and petrol prices have squeezed household budgets. More disposable income in the hands of lower-income people in particular could help people deal with that pressure, tax consultants say.
A panel of lawmakers said as much in a report to parliament in 2012, recommending a change in the “character of the tax regime” and leaving “more disposable incomes in the hands of individual tax payers, particularly those in the lower income bracket.”
But some sound a note of caution.
“Considering the high inflationary trends being observed in the recent past (even after the new government taking charge) an increase in the basic exemption limit may just give the common man some ‘cushion’ of higher disposable income,” Parizad Sirwalla, a Mumbai-based chartered accountant, told Reuters via e-mail.
“However, one will also need to be mindful of the fact that higher disposable income can also lead to higher spending and consequential rise in demand, thereby further fuelling inflation.”
The challenge of containing the fiscal deficit may also limit the finance minister’s ability to take bold steps in personal taxation. India’s fiscal deficit during the financial year ending March 2014 was 5.08 trillion rupees ($86.08 billion), or equivalent to 4.5 percent of the country’s gross domestic product. Fears of a weak monsoon, food inflation and a political crisis in Iraq may also leave the government with less room for such exemptions.
“This is the year of fiscal consolidation. He [finance minister] has to show his commitment to fiscal prudence so he doesn’t have much scope to come out with these measures,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
($1 = 59.7500 rupees)