Prima facie, the Union Budget 2012 seems to be pretty balanced and a realistic one from a finance minister who had been pushed to the wall due to high fiscal deficit, structurally high inflation and deteriorating savings and investment rates. The fact that the finance minister stuck his neck out and raised key tax rates shows that the government is committed to fiscal consolidation and encouraging private investment to kick start growth.
The R20,000-hike in basic exemption limit and the R2 lakh expansion in the income slab subject to 20% rate of tax, both in line with the original DTC Bill, are likely to leave higher disposable income in the hands of the tax payer, which should translate into higher savings.
To complement that, the 20% reduction in STT on delivery trades, tax relief on direct investments in equity by new investors under the Rajiv Gandhi Equity Savings Scheme, hike in import duty on gold, R10,000 deduction on interest form savings bank account and doubling the amount of tax-free bond issuances should ensure that the extra savings are channelised into financial products and capital markets, thereby translating into a higher investment rate for the economy and higher rate of return for invested capital.
However, the fact that the R20,000 deduction under Section 80CCF in respect of investment in infrastructure bonds has been withdrawn is a disappointment for the individual tax payer as well as retail investor as it reduces his/her ability to avail investment linked deductions from R1.2 lakh to R1 lakh.
The intent behind the 20% cut in STT rate and the tax relief on direct equity investments by new investors is to promote the waning equity culture and promote equities as a long-term wealth creation option for the retail investor.
The sub-prime crisis of 2008 and the bear market of 2011 had shaken retail investors’ belief in equities as an asset class. The steps taken in the budget to promote this asset class are laudable. Combine this with the fact that distributors of mutual fund products will not be henceforth subject to service tax will lead to lower costs and hence higher investments by them.
The key gains for the retail investor from the budget will be in the form of higher disposable income and more avenues for investing it.
However, a significant part of the surplus income runs the risk of being taken away in the form of higher indirect taxes on goods and services which will ultimately result in higher prices. Also, most of the key expectations of retail investors or taxpayers including a hike in the limit under Section 80C and that under Section 24(b) in respect of interest paid on home loans, were not met.
Netting out gains and losses for the retail investor, we believe retail investors will gain over the medium to long term from the boost to equity investing provided in the Budget.
Though a bulk of the gains from the hike in exemption limit and widening of tax slab are likely to be taken away by the hike in excise and service tax rates in the short term, in the long run however, with the finance minister presenting a roadmap for fiscal consolidation and giving a boost to investment led growth, savings and investment rates should rise, inflation and interest rates should moderate and the economy should be able to achieve a higher sustainable rate of growth, translating into higher returns from equity markets and positive real rate of return from debt. The short term losses should hence be more than compensated by the higher real returns on investments in the medium to long term. So, the ultimate beneficiary will be the retail investor.
The R20,000-hike in basic exemption limit and the R2 lakh expansion in the income slab subject to 20% rate of tax, both in line with the original DTC Bill, are likely to leave higher disposable income in the hands of the tax payer, which should translate into higher savings.
To complement that, the 20% reduction in STT on delivery trades, tax relief on direct investments in equity by new investors under the Rajiv Gandhi Equity Savings Scheme, hike in import duty on gold, R10,000 deduction on interest form savings bank account and doubling the amount of tax-free bond issuances should ensure that the extra savings are channelised into financial products and capital markets, thereby translating into a higher investment rate for the economy and higher rate of return for invested capital.
However, the fact that the R20,000 deduction under Section 80CCF in respect of investment in infrastructure bonds has been withdrawn is a disappointment for the individual tax payer as well as retail investor as it reduces his/her ability to avail investment linked deductions from R1.2 lakh to R1 lakh.
The intent behind the 20% cut in STT rate and the tax relief on direct equity investments by new investors is to promote the waning equity culture and promote equities as a long-term wealth creation option for the retail investor.
The sub-prime crisis of 2008 and the bear market of 2011 had shaken retail investors’ belief in equities as an asset class. The steps taken in the budget to promote this asset class are laudable. Combine this with the fact that distributors of mutual fund products will not be henceforth subject to service tax will lead to lower costs and hence higher investments by them.
The key gains for the retail investor from the budget will be in the form of higher disposable income and more avenues for investing it.
However, a significant part of the surplus income runs the risk of being taken away in the form of higher indirect taxes on goods and services which will ultimately result in higher prices. Also, most of the key expectations of retail investors or taxpayers including a hike in the limit under Section 80C and that under Section 24(b) in respect of interest paid on home loans, were not met.
Netting out gains and losses for the retail investor, we believe retail investors will gain over the medium to long term from the boost to equity investing provided in the Budget.
Though a bulk of the gains from the hike in exemption limit and widening of tax slab are likely to be taken away by the hike in excise and service tax rates in the short term, in the long run however, with the finance minister presenting a roadmap for fiscal consolidation and giving a boost to investment led growth, savings and investment rates should rise, inflation and interest rates should moderate and the economy should be able to achieve a higher sustainable rate of growth, translating into higher returns from equity markets and positive real rate of return from debt. The short term losses should hence be more than compensated by the higher real returns on investments in the medium to long term. So, the ultimate beneficiary will be the retail investor.
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