This article was written on the budget day in 2012. Two issues I had warned about - the risk of foreign exchange exposure and the dangers of GAAR have since haunted the markets.
Budget 2012: Bus missed, administrative nightmare ahead
Anand Tandon | Saturday, March 17, 2012
The finance minister’s latest fare offers little to cheer - either
for industry, individuals or the market. However, the markets tend to be
optimistic.
The introduction of tax relief for equity investments up to Rs50,000 for small investors is being viewed favourably. Whether it will induce investors to invest or not is another matter.
This seems to be a modified equity-linked investment scheme. Along with the exemption of interest on bank deposits up to a limit, it signals a return to ad hoc tax exemptions—something the government was moving away from.
Individuals will face the prospect of higher and sustained inflation—as service tax and excise increase across most products. There is absolutely no attempt to reduce government spend.
On the contrary, the minister has promised to make available resources for the Food Security Bill—guaranteed to increase expenditure out of proportion and cause sustained inflation. Anyone hoping for a sustained interest rate cut needs to take a deep breath.
Corporate income tax contribution to the government revenue is budgeted to grow 14%— not a challenging assumption. However, higher excise and service tax will potentially reduce growth as companies struggle to pass on cost pressures to the consumer.Incentives for investment remain elusive—growth, if any, is still likely to come from consumption rather than investment.
The opening up of the ECB route for funding domestic infrastructure is likely to create longer-term problems. Bankability of infrastructure projects is a key issue and not so much the source of funds.
With domestic earnings and foreign exchange exposure, the need for careful hedging by borrowing companies cannot be overstated. Given the penchant of the Indian industry to look short term, we are likely to see unhedged exposures leading to demands for increase in user charges when volatile foreign exchange markets are increasing overall cost of borrowers.
Two issues related to taxation have the potential to create long-term growth problems.
One relates to taxation of transactions by overseas companies holding Indian assets. With the Budget allowing a reopening of old cases, the potential for litigation and for an adverse effect on foreign investment is real.
The “GAR” —general anti-avoidance rule—is draconian. Income-tax officers have been handed discretionary powers that are far-reaching. This will seriously complicate tax administration and has the potential to increase corruption manifold.
Other measures such as requirement of tax deduction by purchasers of immovable property can pose administrative nightmares - the devil will lie in the detail.
The decision to increase the cess on up-stream oil companies, potentially reducing post-tax profits by 10%, just a few days after having sold a large chunk of shares in ONGC - and that, too, to LIC should rank as a case of insider-trading of the worst kind.
If this were to be done by shareholders of a private company, it would surely attract a class-action suit. Luckily for the government India is less litigious, and has no precedence of class action of this kind.
However, this would indeed be a fit case to start.
The best that can be said of this Budget is that the government is unwilling to give a direction on where the economy should head. We will therefore continue to be dependent on foreign flows - which are themselves subject to their own central bank policies.
Currently, the positive for the market even after the performance of the first quarter of this calendar year is that at 14.5x FY13; the market remains relatively “cheap”. This is on current expectations of growth.
A slowdown in China, a serious possibility, can lead to lower commodity prices and help Indian companies.
On the flip side, we may see earnings expectations get muted as taxes bite into consumers.
If global flows were to reduce for any reason, the going can get tough. Keep Draghi and Bernanke’s pictures on the wall of your trading floor and seek their blessings. We seem to have run out of ideas.
Anand Tandon, CEO, JRG Securities
The introduction of tax relief for equity investments up to Rs50,000 for small investors is being viewed favourably. Whether it will induce investors to invest or not is another matter.
This seems to be a modified equity-linked investment scheme. Along with the exemption of interest on bank deposits up to a limit, it signals a return to ad hoc tax exemptions—something the government was moving away from.
Individuals will face the prospect of higher and sustained inflation—as service tax and excise increase across most products. There is absolutely no attempt to reduce government spend.
On the contrary, the minister has promised to make available resources for the Food Security Bill—guaranteed to increase expenditure out of proportion and cause sustained inflation. Anyone hoping for a sustained interest rate cut needs to take a deep breath.
Corporate income tax contribution to the government revenue is budgeted to grow 14%— not a challenging assumption. However, higher excise and service tax will potentially reduce growth as companies struggle to pass on cost pressures to the consumer.Incentives for investment remain elusive—growth, if any, is still likely to come from consumption rather than investment.
The opening up of the ECB route for funding domestic infrastructure is likely to create longer-term problems. Bankability of infrastructure projects is a key issue and not so much the source of funds.
With domestic earnings and foreign exchange exposure, the need for careful hedging by borrowing companies cannot be overstated. Given the penchant of the Indian industry to look short term, we are likely to see unhedged exposures leading to demands for increase in user charges when volatile foreign exchange markets are increasing overall cost of borrowers.
Two issues related to taxation have the potential to create long-term growth problems.
One relates to taxation of transactions by overseas companies holding Indian assets. With the Budget allowing a reopening of old cases, the potential for litigation and for an adverse effect on foreign investment is real.
The “GAR” —general anti-avoidance rule—is draconian. Income-tax officers have been handed discretionary powers that are far-reaching. This will seriously complicate tax administration and has the potential to increase corruption manifold.
Other measures such as requirement of tax deduction by purchasers of immovable property can pose administrative nightmares - the devil will lie in the detail.
The decision to increase the cess on up-stream oil companies, potentially reducing post-tax profits by 10%, just a few days after having sold a large chunk of shares in ONGC - and that, too, to LIC should rank as a case of insider-trading of the worst kind.
If this were to be done by shareholders of a private company, it would surely attract a class-action suit. Luckily for the government India is less litigious, and has no precedence of class action of this kind.
However, this would indeed be a fit case to start.
The best that can be said of this Budget is that the government is unwilling to give a direction on where the economy should head. We will therefore continue to be dependent on foreign flows - which are themselves subject to their own central bank policies.
Currently, the positive for the market even after the performance of the first quarter of this calendar year is that at 14.5x FY13; the market remains relatively “cheap”. This is on current expectations of growth.
A slowdown in China, a serious possibility, can lead to lower commodity prices and help Indian companies.
On the flip side, we may see earnings expectations get muted as taxes bite into consumers.
If global flows were to reduce for any reason, the going can get tough. Keep Draghi and Bernanke’s pictures on the wall of your trading floor and seek their blessings. We seem to have run out of ideas.
Anand Tandon, CEO, JRG Securities
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