I-T Exemptions to spur consumption

Keki M Mistry
Financial Chronicle

There was severe pressure on the finance minister to ensure fiscal prudence and simultaneously focus on growth and satisfy market expectation. The finance minister has rightly conveyed that the budget is not the only platform to come out with big-bang measures for economic reforms that the market was expecting.

The removal of the surcharge on personal income tax and the increase in tax exemption limits will favourably benefit a large section of individual taxpayers.

This will ensure that the common man has more disposable income to spend, which may spur spending and consumption by igniting demand, which is conducive for growth in the economy.

Another big benefit from the budget is the extension of tax benefits to the new pension scheme (NPS). The budget has provided an additional sweetener by letting the dividend paid under the NPS to be exempt from Dividend Distribution Tax. All transactions under the new pension scheme will be exempt from Security Transaction Tax.

The removal of the Fringe Benefit Tax (FBT) by itself was a positive measure as it involved a lot of administrative work on the part of companies as FBT computation involved a lot of paperwork, whilst the tax collection was minimal.

However some of the items on which FBT was applicable have now become taxable as perquisites in the hands of employees. For example in the case of employee stock options, the difference between the market price on the date of exercising the option and the option price will now be treated as a taxable perquisite in the hands the employees. Different employees will exercise their options on different dates and value of the perquisite will vary significantly from employee to employee.

The likely fiscal deficit of 6.8 percent has considerably disappointed the market, which was expecting it to be 6.2 percent of the gross domestic product (GDP).

In an attempt to deepen the capital market, the finance minister has proposed to raise the limit of non-promoter share holding in listed companies from the present level of 15 percent. This will give a larger group of investors an opportunity to participate in the market.

The finance minister has rightly increased infrastructure spending and targeted an infrastructure spend of 9 percent of GDP by 2014, this augurs well for the economy.

Finally, though the market reacted negatively to the budget, I believe the finance minister Pranab Mukherjee has delivered a reasonably good budget under the circumstances.