03 March 2013

Property buyers beware! :: Business Line


Finance Bill 2013 seeks to introduce two new provisions dealing with transfer of immovable properties which may have serious consequences for property buyers.
It seeks to provide for tax deduction at source (TDS) at 1 per cent on consideration towards purchase of immovable property effective from June 1, 2013 if the value of the property is Rs 50 lakh or more. This is a major change since it would apply across length and breadth of rural and urban India.

ADMINISTRATIVE RESPONSIBILITY

The buyer has to obtain Tax Deduction Account Number (TAN), deduct and remit the TDS, file TDS returns and issue TDS certificate for the seller to claim credit of this amount. This is an onerous administrative responsibility on the taxpayers.
In the past, there have been issues in TDS credits as the Income Tax department was gearing up its IT infrastructure. While the infrastructure has considerably improved, the question is whether they are geared to handle such a massive fresh inflow of returns and data. More importantly, are the buyers ready?
There are provisions under the Income Tax Act which mandate sub-registrar to file an annual return capturing immovable property transactions with value of over Rs 30 lakh. So, do we need TDS provision to track these transactions? TDS provisions are being introduced due to non-quoting or wrong quoting of Permanent Account Number by the transacting parties while providing details to the sub-registrar. If tracking of the transaction is the fundamental reason for this new TDS provision, it would be better to fine-tune the existing system by introducing checks and balances rather than introducing TDS provisions as a substitute.

LEGAL ISSUES

Any new provision brings in host of legal and practical issues. For example, issues such as whether TDS would apply for transfer of property under scheme of amalgamation or demerger would arise. In joint development agreements, the landowner transfers land in consideration for cash and built up space. It is a settled law that TDS provisions would apply even when the consideration is in kind and the builder has to withhold tax by valuing the building, opening up valuation issues for the builder.
In such contracts, capital gains could arise even on allowing possession of the property, subject to certain conditions being fulfilled. In such a case, consideration would be received by the land owner later than the year of transfer, leading to issues of matching of TDS credits to income.
These provisions, if introduced for merely monitoring purposes, would lead to larger technical and practical issues, leading the contracting parties to transact in cash or indulge in splitting up the documents by registering undivided share of land in multiple names. It is best to sharpen the existing mechanism rather than inventing a new one. Similar provision was proposed in the Finance Bill 2012, but dropped based on the representations from various sectors when the Bill was enacted.

TRANSFER FOR INADEQUATE CONSIDERATION

Another amendment is the proposal to tax the buyer on the difference between consideration paid for buying immovable property and the stamp duty value of such property, if the former is lower than the latter. Currently, the law requires the seller to pay tax on the same difference under section 50C and if this new proposal is enacted, the same amount would be taxed in the hands of the buyer also. Section 50C of the Act itself is a tax on notional income and to double tax such notional income cannot be justified. A similar provision, though introduced originally in 2009, was removed retrospectively by Finance Act, 2010 considering this double taxation issue.
It would be welcome move if the Government drops these provisions, which would create hurdles in immovable property transactions.
(The author is a Partner in BMR & Associates LLP. Views expressed are personal)

Technicals: SBI, Reliance Industries, Tata Steel, Infosys:: Business Line


Technicals: Crompton Greaves, SAIL, Central bank, Reliance Broadcast, Micro Technologies, Lovable Lingerie :: Business Line

 

Go short on IndusInd Bank futures ::: Business Line


Still in the woods :: Business Line


Guarding against GAAR :: Business Line


Ever since the first avatar of GAAR found its way into the proposed Direct Taxes Code – version 2010, it has held the attention and imagination of taxpayers and investors. Coming on the heels of the retrospective amendment in the law to overrule the Supreme Court ruling in the case of Vodafone, it was only natural that when GAAR finally found its way into the law in Budget 2012, stakeholders made a high pitched plea to iron out many of the provisions and also to defer the implementation itself. The noise worked and the implementation was pushed to 2013 when Parliament finally approved the 2012 Budget proposals.
As part of wave of reforms that the Government embarked upon in 2012, a committee headed by Dr Parthasarathi Shome was set up to make recommendations on GAAR. The Committee presented its final report in September 2012 and the Finance Minster had in January 2013 indicated that most of the recommendations of the Committee would be accepted, including deferring its implementation to financial year 2015-16.
Yet, with the experience that when it comes to tax laws nothing should be taken for granted unless the fine-print has it loud and clear, all eyes were on Budget 2013 to see to what extent the recommendations of the Committee would be accepted and what further surprises lay in store.
Among the changes that have been made, the most important one is that now GAAR would apply only to those arrangements whose main purpose is to obtain a tax benefit. The provisions also state that factors such as the period for which an arrangement exists and the fact that taxes have been paid under the arrangement may be considered relevant but not sufficient, while determining the applicability of GAAR to an arrangement:
This is a big leap from the existing GAAR provisions, which explicitly and completely disregarded the above mentioned factors while applying GAAR to an arrangement. Interestingly, the Supreme Court had also considered these factors while pronouncing its ruling in favour of Vodafone.
The constitution of the Approving Panel to be formed for the purpose of overseeing GAAR related matters would now be headed by a sitting or retired judge of a High Court. The directions of the panel would be binding on both, the Revenue authorities and the taxpayer. No appeal can be filed against the directions issued by the panel, although an order issued pursuant to such directions can be appealed before the Income-tax Appellate Tribunal.
While no doubt these changes have created much needed comfort, some of the important recommendations of the Shome Committee, which the Finance Minister had announced as having been accepted, do not find place in the proposals.
Among these the grandfathering provisions for investments already in place before August, 2010 and respite for Foreign Institutional Investors or their investors irrespective of whether or not they claim the benefits of the relevant DTAA stand out. It is hoped that at least some of the missing recommendations will be introduced by way of guidelines and rules.
Interestingly, the GAAR amendments are also silent on the applicability or otherwise of GAAR where a Tax Treaty already provides for a specific anti-avoidance provision.
This just lends credence to the view that every possible unilateral measure is being taken to neutralise the benefits under Tax Treaties, with the proposed new 20 per cent tax on share buy-backs being a striking example.
Is GAAR an idea whose time has come? This will remain a topic of debate for the next few years. I would wish in anticipation that the Government actually makes a positive example of the implementation of GAAR
(The author is Partner, BMR Advisors. The views are personal.)

A good balance- NIMESH SHAH, MD & CEO, ICICI Prudential :: Business Line


The Budget was announced on the sidelines of a pre-election year, a high fiscal and current account deficit and worries of a rating downgrade.
The Finance Minister has delivered a credible Budget.
Affirmative action at driving fiscal consolidation has been the biggest takeaway, with the Finance Minister increasing taxes on items consumed by the rich and hiking corporate tax and income tax of individuals earning more than Rs 1 crore per annum.
On the issue of promoting investments in the financial sector, there has been some shortfall in expectations.
TDS has been imposed on the sale of houses above Rs 50 lakh and service tax for new flats increased.
Besides, Dividend distribution tax on debt mutual funds has been increased to 25 per cent from 12.5 per cent. .
Finally, the Government has also demonstrated clear intent to facilitate infrastructure development.
Steps like an investment allowance at the rate of 15 per cent to a manufacturing company investing more than Rs 100 crore in plant and machinery over the next two years have been aimed at incentivising investment. Infrastructure sector is now poised for growth.
On equity investment, we are more positive now. With the roadmap on fiscal consolidation in place, there is a strong case now for increasing allocation to equity over the next three months.

TAXING THE CLASSES

On the fixed-income side, the market sentiment has been volatile, post-budget, on higher-than-expected government expenditure (borrowing of Rs 630,000 crore, against market expectation of Rs 590,000 crore.
This has led to 7-8 bps spike in bond yields. The Budget has rationalised taxation in favour of the masses vs the classes.
(The author is MD & CEO, ICICI Prudential AMC. The views are personal)

Rooted in reality :: Business Line


With the economy was facing multiple challenges on both growth and inflation, the market was looking forward to this year’s Budget. Concerted policy action since September 2012 built hopes of a big bang budget.
However, the Budget was rooted in reality with a strong orientation to fiscal responsibility.
While the market may sulk in the near term, it would realise the importance of a prudent fiscal policy over the course of the year.

SUBSIDY MEASURES

Plan expenditure has been normalised over last year’s budget estimates, while the subsidies have been thoughtfully provided.
Petroleum subsidies, which shot to Rs 96,000 crore, against budget estimates of 43,000 crore at the beginning of the year have been rationalised to 65,000 crore with the promised action of capping LPG cylinders to 9 and increasing diesel prices by 50 paisa per litre per month. Food subsidy has been provided keeping in mind the incremental allocations towards the Food Security Bill.
Rural thrust is evident in the Budget with a 46 per cent increase in allocation to rural development and a 22 per cent hike for the Agriculture Ministry.

NO BIG BANG

Growth is likely to gradually improve during the course of the year on the back of a combination of monetary and fiscal measures against the backdrop of declining inflation.
The Budget stayed away from stoking growth in the form of any direct policy interventions but the focus seems to be on creating conducive conditions in the form of lower deficits.
While the market was a tad disappointing due to lack of any big bang policy announcements and some minor irritants in the form of CTT, and an increase in surcharge for the corporates, it will be back to tracking the growth trajectory of the economy in the face of the belt-tightening by the government.
(The author is CMD, Angel Broking. The views are personal.)

Understanding frequently used Budget terms ::: Business Line


Are you a little confused when you read about the Budget in newspapers? Do terms such as current account deficit, fiscal deficit, Government expenditure, excise duties, import duties boggle you? Here’s de-jargonising some of these terms.

ON EXPENDITURE

The Government classifies its expenditure in terms of planned expenditure and non-planned expenditure.
Planned expenditure is what is spent through centrally-sponsored programmes and flagship schemes such as Bharat Nirman, the Mahatma Gandhi National Rural Employment Guarantee Act and the National Rural Health Mission. Besides this, it includes the Centre’s assistance to States and Union Territories. For 2013-14 fiscal, Rs 5.55 lakh crore is earmarked for planned expenditure. For the last fiscal, it was Rs 5.21 lakh crore.
Non-planned expenditure refers to all other expenditures such as that on defence , subsidies, interest payments, wage and salary payments to Government employees, grants to foreign governments and so on. For the 2013-14 fiscal, Rs 11.1 lakh crore has been earmarked for this.

ON DEFICITS

Now, the Government has to finance such expenditure through its revenues. These revenues may not match up to the level of expenditure.
This is where fiscal deficit comes in. It is the difference between the Government’s total expenditure and total receipts or revenues, excluding borrowings.
Where does the Government get revenues from? Tax revenues (net of transfer payments - payments to households for social objectives such as maintaining minimum living standards, providing health care), one-time sources such as disinvestment, spectrum auction and so on. These may, as has been the case, fall short of estimates.
Deficit is financed by borrowings from the Reserve Bank of India or through market borrowings, mostly from banks or large institutional investors. India’s current fiscal deficit is expected to be around 5.1 per cent. The aim is to bring this down to 4.8 per cent of the GDP by the next fiscal. Current account deficit (CAD) is the difference between a country’s total exports of goods, services and transfers (such as foreign aid) and total imports of goods, services and transfers. The difference is financed by foreign portfolio flows such as FII, FDI, external commercial borrowings, foreign deposits (such as NRI deposits), and so on.
It isn’t necessary that a CAD is harmful for a country. Say a country is importing heavy machinery which will improve the production capacity or make the current production capacity more efficient.
That’s a good thing. But if the CAD is because of importing goods which are mainly for consumption purposes such as luxury cars, which does not add to production capacities or fuel exports, then it is harmful for the country.
CAD can be sustained up to certain threshold. If a country suffers a high CAD for a sustained period of time, it could be difficult to keep attracting required inflows or finance imports. It could further increase a country’s vulnerability to international financial volatility.
A high fiscal and current account deficit could lead to a danger of being down-graded by ratings agencies, making it harder and more expensive to raise finance. Investors could lose faith in the country’s ability to sustain growth. India’s CAD stood at 4.6 per cent of the GDP for the first half of the current fiscal.

Budget- And the winners are….. ::: Business Line


The Budget speech has been read and re-read. The accompanying documents have been analysed threadbare. So, why not get down to the brass tacks and look at the stocks in your portfolio that are likely to gain or lose from proposals in the Budget?
Here are three sets of definite winners that should help you rethink your portfolio.
There has been much moaning and groaning about the new surcharge on corporate tax, which will entail a Rs 6,000-7,000 crore additional outgo for India Inc. But one little item tucked away in section 32AC of the Income-Tax Act may help a few companies earn tax breaks that will more than offset this surcharge.
This is the 15 per cent tax deduction for manufacturing companies which invest Rs 100 crore or more in new plant and machinery over the next two financial years. Last year’s numbers show that listed manufacturing companies made aggregate investments of over Rs 3.1 lakh crore in new fixed assets. A 15 per cent deduction on this would mean a Rs 11,000-crore tax saving at an effective tax rate of 24 per cent (the average for India Inc).
However, the specific beneficiaries of this investment allowance would be companies which have lined up concrete expansion plans for 2013-14 and 2014-15. Sifting through data from CMIE shows that sectors such as petroleum and polymers (Rs 62,000 crore), steel (Rs 53,000 crore) and aluminium (Rs 26,000 crore) are likely to bag the biggest benefits.
Going by their capex plans, companies that may get to pay substantially lower taxes over the next two years are SAIL (Rs 42,000 crore capex plan), Hindalco (Rs 20,000 crore), Reliance Industries (Rs 16,000 crore), NMDC (Rs 15,000 crore), Ultratech Cement (Rs 5,000 crore), BGR Energy (Rs 2,300 crore) and others.

POWER GENERATORS

The power sector has a litany of woes, ranging from poor coal availability to delayed payments from State electricity boards. But the Budget has a lifeline in the form of a one-year extension in the time limit for availing the tax holiday under Section 80IA.
Adani Power’s Kawai and Tiroda projects, Tata Power’s Maithon and Mundra Ultra Mega Power Project and KSK Energy Ventures’ Mahanadi Plant are projects expected to be commissioned in 2013-14. If these projects come up on time, their profits will be completely tax-free for the first 10 years. This may lower their overall tax incidence too.
The proposal for a PPP (private-public partnership) model for Coal India’s mines, if it materialises, may help step up supplies of cheaper domestic coal.
That will particularly help Adani Power, Lanco Infratech and Sterlite Energy which rely on local coal for some of their projects.

MID-PRICED HOMES

Two proposals — additional interest deduction of Rs 1 lakh (available to first-time home buyers of sub-Rs 40 lakh homes, with a maximum loan of Rs 25 lakh) and allocations to housing funds (new allocation of Rs 2,000 crore to urban focus and increasing rural-housing fund allocation to Rs 6,000 crore) can deliver a boost to demand for low-cost homes.
The listed companies that would benefit from this would be those with presence in tier-2 and tier-3 cities in the residential segment. Mahindra Life Space, India Bulls Real Estate, Godrej Properties and Omaxe have projects under construction or under consideration in tier-2/-3 cities such as Pune, Ahmedabad, Hyderabad, Nagpur, Ludhiana and Bhubaneswar.
Puravankara, a Bengaluru-based builder, routes its mid-priced housing foray through subsidiary Providence Housing. It contributes one-fourth of the revenues.

AND NOW THE LOSERS

Why go on about the losers? The list is long, but here briefly, are the key ones…

CAPITAL INADEQUACY

With bad loans inching up and Basel III looming ahead, capital will be the key fuel for public sector (PSU) banks in the year ahead.
An RBI estimate puts their capital requirement over the next five years at Rs 90,000 crore. Against this backdrop, the Budget proposal to infuse Rs 14,000 crore in 2013-14 into PSU banks looks quite stingy.
Then, there is the diktat that banks must increase their agricultural lending from Rs 5.75 lakh crore to Rs 7 lakh crore. The share of PSU banks in agriculture lending is already over 80 per cent. This has led to mounting bad loans. While non-performing assets (NPAs) for PSU banks in priority sector grew 36 per cent, agriculture NPAs surged by 56 per cent.
This is why the increase in agriculture lending will be negative for all PSU banks already weighed down by loan-quality problems.
Banks such as Punjab National Bank, Bank of India, Bank of Baroda and State Bank of India already have an exposure of more than 12 per cent to the agriculture sector.

UTILITY VEHICLE MAKERS

If commercial vehicle makers have got Budget handouts in the form of new bus orders, there is a speed-breaker ahead for sports utility vehicle (UV) makers.
For one, the Budget has hiked excise duty from 27 per cent to 30 per cent for vehicles exceeding engine capacity of 1,500 cc. This further widens the gap between the normal rate for motor vehicles (12 per cent), vehicles with engine capacity of less than 1,500 cc (24 per cent) and these UVs. With the industry usually passing on cost increases to customers, UVs might turn costlier sooner than later. This could force a slowdown in the UV segment’s scorching pace of growth (57 per cent) this fiscal. Two, lower Budget allocations for oil subsidies, taken with the recent freeing up of diesel prices, suggest that diesel prices are likely to trend up.
With this, the edge that UVs have over petrol cars on running costs will likely begin to narrow. That means lower demand for listed UV makers such as Tata Motors and Mahindra & Mahindra. The latter is already facing challenges from a slowdown in tractor sales.

HIGH TAX PAYERS

The hike in the surcharge on corporate taxes from 5-10 per cent will impact all companies that currently turn in a profit and shell out taxes. Overall, a back-of-the-envelope calculation shows that companies may be forced to part with 1 per cent more of their pre-tax profits to the taxman. As the surcharge is calculated on a company’s existing tax bill, this measure will extract a stiffer price from companies that already suffer high tax incidence.
Multinational companies top this list. Apart from this, companies that figure in this bracket are bank and finance companies such as IDBI Bank, Axis Bank, Yes Bank and HDFC Bank, public sector majors such as Engineers India, BEML, Oil India and MOIL, and pharma companies such as Pfizer, Abbott and Dr Reddy’s Labs.

Limited glitter for gold funds ::: Business Line


Good start to solving economy problems ::: Business Line


Now, it all depends on whether the Finance Minister is able to walk the talk on fiscal consolidation.
Sometimes the first step to solving a complicated problem is to recognise the problem. By acknowledging that the Indian economy is currently challenged, the Finance Minister set the context for finding solutions to resolve our imbalances of slowdown, high twin deficits and elevated inflation levels.
Despite the compulsions of a pre-election year, the Minister has laid out a credible path of fiscal consolidation by budgeting to reduce fiscal deficit to 4.8 per cent of GDP in fiscal 2014. This is an important step, given the continued scrutiny of our fiscal situation by external rating agencies. As we lay out a path for growth recovery by resolving our stalled projects and kick-starting the investment cycle, renewed concerns regarding our sovereign rating would be significantly counter-productive.

STALLED PROJECTS

In this regard, the proposal of an investment allowance for companies investing more than Rs 100 crore in plant and equipment is an important step forward. Similarly, the proposal to constitute a regulatory authority for the road sector should be helpful in resolving stalled projects. There is no doubt that if we can start a virtuous cycle (high investment leading to high growth leading to low inflation) like the one we enjoyed in 2005-2007, then a number of our economic challenges will resolve themselves.
Regarding growth, a significant impetus will also be provided by the 29 per cent increase in Plan spending in fiscal 2014 over fiscal 2013. The Plan outlay has been increased across a number of social development sectors such as agriculture, rural development and health and education. That said, from a longer-term perspective kick-starting our domestic investment cycle should remain the key focus of our policymakers. In this regard, we hope that the Cabinet Committee on Investment resolves at least some of the almost Rs 8-trillion worth of stalled infrastructure projects.

INFLATION DICHOTOMY

On the issue of inflation, India is facing a bit of a dichotomy with significant moderation in the wholesale price index (WPI) to 6.6 per cent in January from 8 per cent in August-September, while the consumer price index (CPI) continues to be in double digits.
A key reason is that food inflation, which constitutes a much larger proportion of the CPI than the WPI, remains elevated in our country. To address this high level of food inflation and growing demand for food items, the Minister has talked about taking supply-side reforms forward.
Moreover, the Minister needs to be congratulated on the steps taken to augment financial savings.
First, the Rajiv Gandhi Equity Savings Scheme has been liberalised to give incentives to higher retail participation in the equity market. Moreover, the introduction of inflation-linked bonds will be a significant alternative to gold as a savings instrument. No doubt, the best long-term solution to our addiction to gold is to bring inflation down to a much lower 4-5 per cent range.
Maybe the markets were a bit disappointed because of the additional surcharge on corporate profits or because some may have thought the 19 per cent expected increase in gross tax receipts is unrealistic.
But these are smaller considerations, given the larger economic backdrop of the country. If the Minister continues on the fiscal consolidation path as promised, and lower fiscal deficits result in lower current account deficit and lower inflation, then this Budget can be categorised as a success in putting India back on the right path.
(The author is CEO, Aditya Birla Financial Services.)

Reason to cheer for first-time home buyers ::: Business Line


ICICI Bank: Buy:: Business Line


Budget will hit equities; fiscal deficit to be at 5%: Goldman Sachs in BL


While the fiscal consolidation plan unveiled in the Budget is in line with expectations, the composition of fiscal deficit (FD) reduction based on optimistic revenue rise than on spending cuts is a disappointment, Goldman Sachs said on Friday.
The investment bank, therefore, is not optimistic about the Government’s ability to meet fiscal deficit target set at 4.8 per cent of GDP for FY14, and sees it’s touching 5 per cent on a possible fall in the revenue mop—up side.
“Given the Budget proposals, the fiscal deficit may be 5 per cent against the projected 4.8 per cent next fiscal.
Thus, the net borrowing requirement (Rs 4.88 trillion according to the Budget target) may be higher than budgeted,” Goldman Sachs said in a report.
The brokerage said the Budget could have a short—term negative impact on equities, bonds and the rupee as no new reform measures have been announced by the Finance Minister.
The report, however, noted that fiscal trajectory has changed for the better over the past months due to front— loading of consolidation and the Government’s debt ratio remains on a declining path.
On expenditure front, it said the Government has budgeted for a significant increase in expenditure to the tune of 16 per cent with a rise in non—subsidy current spending.
“While subsidies have been reduced significantly, there can be some upside to them, especially to food subsidy bill if the Food Security Bill is passed and implemented.”
In terms of spending priorities, Goldman Sachs said there is a significant increase in rural, agricultural, infrastructure, and social spending, apart from Rs 14,000 crore for recapitalisation of the public sector banks.
It said the Budget may be negative for bond yields due to higher—than—expected net market borrowing requirement. “RBI may need to do a significant amount of open market operations to finance the deficit and inject liquidity into the system.”
The report said the Budget would have negative impact on equity markets due to hike in the corporate tax surcharge. .
“We think the Budget may be negative for investor sentiment and for the rupee, at least in the short term, as it has not taken up any major proposals to bring down current account deficit (which touched 5.4% in Q2, FY13).”