It’s almost a week since the union budget for FY24 was presented in the parliament. The budget documents have been analysed by a variety of experts. Most of these experts have focused their opinion on the budget as per their professional affiliations and/or ideological orientation.
If I may sum up the consensus opinions, it would be as follows:
· Development economists have criticized the budget for inadequate allocation to the social sector, especially education, health, rural welfare, MNREGA etc.
· Market economists and strategists have commended the budget for higher allocation towards capital expenditure and commitment to fiscal discipline despite political expediency.
· Accounting and tax professionals have spoken about the changes proposed in the tax laws to ease compliance and plug tax evasion loopholes.
· The changes in personal taxation have not evoked much discussion or debate, given the tiny size of taxpayer that would be impacted by the changes.
From the investors’ viewpoint, however, there are some budget proposals that may potentially have deeper and wider impact than what would appear prima facie. Investors therefore need to examine these proposals in some more detail. I would for example like to, inter alia, analyse the following in some more detail:
Impact on working capital
The budget proposes to force businesses to make prompt payments to MSME. It is proposed that if a business fails to make payments to MSME vendors within the time specified in the MSMED Act (45 days or less), the expense in respect of such payment will be allowed only on actual payment basis, and not on accrual basis.
It would be worth examining Automobile OEMs, FMCG companies, textile companies etc. who have major sourcing from MSME vendors. This provision could have a material impact on their working capital financing requirement; as the credit period of MSME dues reduces to less than 45 days.
Insurers’ demand for gilt
Life insurance companies are one of the major buyers of government securities. The budget proposes to withdraw tax concessions in respect of insurance policies where the annual premium is in excess of rupees five lacs per annum per insured person. The instant market reaction to this proposal has been quite negative for life insurance companies.
If the market reaction was valid and life insurance companies are most likely to see a sharp fall in new insurance premium; it would be worthwhile to examine the impact of lower incremental insurance companies’ demand for government securities. Given (i) most banks are facing deterioration in the credit to deposit ratio due to faster rising credit demand; and (ii) the changes in rules of TDS on interest for the foreign portfolio investors are likely to further adversely impact the foreign demand for the Indian gilt; lower insurance demand could pressurize the bond yield higher.
Investors need to analyse this factor carefully to find out if any changes in asset allocation are required.
Savings vs Tax savings
In the past couple of years, the finance minister has given clear indications that the government wants to move towards a new tax regime with minimum tax exemptions and deductions. The latest budget reaffirms this stance.
Savings linked to tax saving schemes has been particularly popular amongst the salaried tax payers. It would not be exaggeration to say that a section of tax payers has been forced to curb consumption and save. Most of these savings have been in savings schemes like EPF, PPF, NPS or life insurance. Lately, contribution to equity linked savings schemes has also attracted greater interest. Besides savings, tax concessions have encouraged investment in residential properties also.
The genesis of tax concession to encourage savings lies in the socialist regimes of yesteryears where (i) focus of governments was on curbing consumption; (ii) fiscal deficit financing was only from the domestic sources; and (iii) social security was negligible for non-government employees. The governments offered higher rates of interest and favourable tax treatment even on interest to encourage savings. This has put the banking system at relative disadvantage and prevented rates from falling materially in good times.
Most of these conditions are now changing fast. There is no need to curb consumption. Foreign borrowing is permitted for fiscal deficit financing. Changes in pension rules for government and PSE employees and introduction of a variety of social security schemes have changed the needs of savers of various categories of investors.
It is therefore appropriate that interest rate regimes are made more market oriented; and saver are encouraged to explore more attractive investment options.
An anomaly however is over reliance of the government on the small saving schemes for deficit financing. Over 40% of the deficit is now financed through high cost small savings. Considering the fiscal constraints of the central and state government, small saving schemes run the risk of turning into a Ponzi scheme where the old obligations could be discharged only from the fresh inflows. If we build even 2% probability of new flows being insufficient to fulfil redemption/maturity demand, we could have a disaster of epic proportions.
Game of Tom and Jerry continues
It has been a consistent endeavour of every finance minister in the past couple of decades to plug the loopholes that were being used for tax avoidance by the wealthy taxpayers. However, the tax experts and money managers have been able to find alternative methods. Thus, the game of Tom and Jerry continues between the tax authorities and taxpayers.
Staying with the tradition, the finance minister has sought to plug some more avenues that were frequently used by taxpayers to lower their tax liability. Rationalization of tax on income from market linked debentures (MLDs); large insurance policies; reinvestment of long term capital in buying house property, meaningful TCS on foreign travel and investments; etc. are some major proposals in the latest budget to curb tax avoidance.
Investors may note that with every budget the avenues for tax avoidance are narrowing. Thus, it is pertinent that they avoid “tax avoidance” as one of the investment objectives. The chances of them ending up more tax in their endeavour to save taxes are rising with each budget.
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