Ambit Capital Research expects Finance Minister P Chidambaram to present a dream budget for FY14 with the promised fiscal consolidation as well as progressive tax reforms.However, mid-year increases in discretionary expenditure in a pre-General Election financial year (in the form of populist schemes such as a farm-loan debt waiver) is likely to result in moderate fiscal slippage in FY14.
How FM is likely to limit fiscal slippage in FY13?
Chidambaram is likely to have averted much of the fiscal slippage by making deep cuts in plan expenditure, and taking advantage of the fact that Government accounts are maintained on a cash basis (which allows for postponement of expenditures like the petroleum subsidy bill payment.)
Deep cuts in plan expenditure to the tune of Rs50000 crore are likely to be the key tool that the Government is likely to employ to limit the fiscal deficit in FY13.
With the FM attempting to engineer an economic turnaround, the Ministry of Finance is likely to keep both the service and excise duty rates untouched at12 percent with a clear focus on getting rid of exemptions and concessional rates to prepare for GST implementation.
A surcharge for the super rich: An upward shift in personal income tax slabs coupled with the imposition of a higher tax rate for the super-rich is likely this Budget. This is likely to assume the form of a 10% surcharge on the super-rich and thereby help the Government meet the twin goals of tax augmentation and a pro-poor stance as the super-rich in India (i.e. with an income of Rs20 lakh account for 1% of tax payers in India and they pay 63% of total income taxes.
Dividend tax: The govt is likely to impose a temporary 10 percent tax on annual dividend income exceeding Rs 15 lakh. Currently, dividend is not taxable in the hands of shareholders.
Whilst institutional investors are likely to be exempt from this tax, corporates and individuals could be pulled into this tax net. If such a tax were to be imposed, stocks with high dividend yields would become less attractive to hold. Particularly adversely impacted would be PSU bank stocks.
Increase in basic custom duty on crude: Given that oil imports account for a third of India’s overall imports and given that oil imports, in value terms, are the most volatile component of India’s import bill, import duty rates of crude and the price of oil are the key determinants of growth in customs duty collections in India.The basic customs duty on crude may be hiked from 0 percent currently to 5 percent because global crude prices are not as volatile as last year.
Corporate tax: Rationalisation’ and ‘base expansion’ are likely to continue to be key
budget themes, with administration of a reduction in surcharges for corporates, an increase in MAT, enhanced incentives for fixed investment, etc.
" In corporate income tax, whilst the rate for the minimum alternate tax (MAT) has been systematically increased, the surcharge rate has been systematically lowered from 10% in FY06 to 5% in FY12. We expect this trend to spill into FY13 as well whereby income tax slabs are shifted higher, the corporate rate of surcharge is reduced, and MAT is increased possibly under the umbrella of the diluted Direct Tax Code."
Disinvestment: The government is also likely to garner around Rs 30,000 crore from its heavy disinvestment agenda for FY14t o provide additional revenues amid buoyant equity market conditions.
Data provided by Ambit Capital