March 5, 2010

Union Budget: A Forward looking step

By Fundsupermart.com Research Team

The budget was presented by the Finance minister (FM) Pranab Mukherjee on 26th  February 2010.  In the run up to the budget, the markets were concerned about the level of fiscal deficit and the related funding of the deficit, future road map for reduction of deficit, withdrawal of fiscal stimulus, introduction of Goods & Service Tax (GST) and Direct Tax Code (DTC).

The FM presented a budget that has more or less covered the market expectations by easing off the
stimuli within expectations, encouraging consumption-led growth by leaving more income in the hands of tax payers and setting targets for reduced deficits in the next two fiscals. The markets cheered the budget with the SENSEX closing higher by 175 points. The expenditure outlay for the Infrastructure sector, especially, has heartened as it continues to be critical to the country’s growth.

Here are the key budget highlights.

Direct Taxes

The new personal income slabs have been increased

·     Deduction of an additional amount of Rs. 20,000 allowed, over and above the existing limit of Rs.1  lakh on tax savings, for investment in long-term infrastructure bonds as notified by the Central Government
·     Current surcharge of 10 per cent on domestic companies reduced to 7.5 per cent.
·     Rate of Minimum Alternate Tax (MAT) increased from the current rate of 15 per cent to
18 per cent of book profits.
·     Benefit of investment linked deduction under the Act extended to new hotels of two-star category and above anywhere in India to boost investment in the tourism sector.

The direct tax statement by the FM has come as a boon to the individual tax payers. The FM has increased the  slabs  for taxes which will put more money into the hands of the individual tax payer. Also, the government proposes an additional deduction of Rs. 20,000 apart from Rs. 1 lac under 80 C, wherein the Rs. 20,000 will be invested into the infrastructure bonds as notified by the central government. This benefits both the tax payer and  infrastructure projects. With this budget, the tax payer can save an additional amount of maximum of Rs. 57,000 in tax payments.

However, companies mostly from the service industry will be paying higher taxes on account of MAT.

Tax Reforms
·     Government to introduce the Direct Tax Code (DTC) from April 1, 2011
·     Government to also introduce the Goods and Services Tax (GST) from April 1, 2011

Both the tax reforms aim at eradicating overlapping taxes and simplifying the taxation structure.

Banking and Financial Services Sector

An apex level Financial Stability and Development Council to be set up with a view to strengthen and institutionalise the mechanism for maintaining financial stability
·     RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.
·     Rs.16,500 crore provided to ensure that the Public Sector Banks are able to attain a minimum 8% Tier-I capital by March 31, 2011.
·     To encourage the people from the unorganised sector to voluntarily save for their retirement, the Government will contribute Rs.1,000 per year to each New Pension Scheme (NPS) account opened in  the year 2010-11. This initiative, "Swavalamban" will be available for persons who join NPS, with a minimum contribution of Rs.1,000 and a maximum contribution of Rs.12,000 per annum during the financial year 2010-11

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