Mr. Navneet Munot, CIO, SBI Funds Management - Impact of Union Budget 2013

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Union Budget 2013 – Highlights

The Union Finance Minister Mr. P. Chidambaram presented UPA Government’s budget for 2013-14 in Lok-Sabha on 28th February 2013. The key focus of this budget has been bringing down the fiscal deficit hence avoiding the risk of credit rating downgrade. It was a challenge for FM to reduce deficit concerns without jeopardizing growth. Finance Minister has kept fiscal deficit target at 4.8% for FY 2013-14 and seeks to close current financial year at fiscal deficit at 5.2%. Finance Minister raised concern about current account deficit which continues to be high due to excessive dependence on oil, coal and gold imports and slowdown in exports. Ahead of next year's General Elections, Finance Minister P Chidambaram did not tinker with the Income Tax slabs or rates while presenting the Union Budget 2013-14 in the Lok Sabha. As part of his tax proposals, he gave a benefit of Rs 2,000 to individual tax payers with taxable income of up to Rs 5 lakh. A surcharge of 10% on earning over Rs. 1 crore in a year has been imposed on individuals, HUFs, firms and entities with a similar tax status. The Finance Minister announced that first-home buyer who takes a loan for an amount not exceeding Rs 25 lakh would be allowed an additional deduction of interest of Rs 1 lakh to be claimed in assessment year 2014-15. But in bad news for consumers, the Finance Minister made mobile phones, cigarettes and luxury vehicles costlier by hiking duties on these products.

Followings are the key highlights of the budget:

 Fiscal Deficit/ Borrowing: Fiscal deficit target has been kept at 4.8% of GDP for FY 13-14. Fiscal deficit seen at 5.2% of GDP in current financial year. Gross market borrowing seen at 6.29 trillion rupees in 2013-14. Net market borrowing seen at 4.84 trillion rupees in 2013-14. Govt. to buy back 500 billion rupees worth of bonds in 2013-14.
 Inflation: Food inflation is worrying, will take all steps to augment supply side. Headline WPI inflation has come down below 7% and core inflation to 4.2%.

 Taxation:

•      Proposes surcharge of 10% on rich taxpayers with annual income of more than Rs. 1 crore a year.
•      No change in slabs and rate for personal income tax.
•     Tax credit of Rs 2000 to be provided to every person to having income of up to Rs 5 lakh.
•     5 to 10% surcharge on domestic companies whose taxable income exceeds Rs 10 crore.
•     First housing loan up to Rs 25 lakh would get additional deduction of interest of up to Rs 1 lakh in                  
•     FY 2013-14.
•     DDT (Dividend distribution tax) on debt mutual funds has been raised from 12.5% to 25%.
•     Commodities transaction tax levied on non-agriculture commodities futures contracts at 0.01%.
•     Modified GAAR norms to be introduced from April 1, 2016.
•     Direct Taxes Code (DTC) bill to be introduced in current Parliament session.
•     No change in basic customs duty rate of 10% and service tax rate of 12%.
•     Import duty on rice bran oilcake withdrawn.
•     Import duty raised on set-top boxes from 5 to 10% to safeguard interest of domestic producers.
•     Import duty raised from 75 to 100% on luxury vehicles.
•     Duty free limit on gold raised to Rs 50,000 in case of male and Rs 100,000 in case of female.
•    Specific excise duty on cigarettes and cigars raised by 18%.
•    Excise duty on SUVs to be increased to 30% from 27%, SUVs registered as taxis exempted.
•    Duty on mobiles above Rs 2,000 raised from 1% to 6%, based on their maximum retail prices.
•    Service tax to be levied on all AC restaurants.
•    One time voluntary compliance scheme for service tax defaulters to be introduced. Interest and         penalties to be waived.
•  Education cess to continue at 3%.
•  TDS of 1% on value of properties above Rs 50 lakh. Agriculture land exempted.
•  Securities Transaction Tax (STT) reduced on equity future, mutual fund.
•  Propose to impose withholding tax of 20% on profit distribution to shareholders.
•  Rajiv Gandhi Equity Scheme will be liberalised to allow first time investor to invest in Mutual Fund  and equity.
•  Corporate Sector and Markets
•  Tax free bonds issue to be allowed up to Rs 50,000 crore in 2013-14 strictly on capacity to raise  funds from the market.
•  Four Infrastructure debt fund have been registered.

 Investor with stake of 10% or less will be treated as FII; any stake more than 10% will be treated as FDI.
 FIIs will be allowed to participate in exchange traded currency derivatives.
 Foreign institutional investors (FIIs) can use investments in corporate, government bonds as collateral to meet margin requirements
 Insurance, provident funds can trade directly in debt segments of stock exchanges


Market Outlook: We see this budget as a path towards fiscal consolidation. The Finance Minister has tried to increase growth rate while maintaining fiscal prudence. He has tried to cut the subsidy outgo and reduce fiscal deficit but at the same time to keep the growth momentum going he has increased the plan expenditure by almost 30% to Rs.5.55 lakh crores. This will pave the way for RBI to cut rates going forward. It becomes imperative for RBI to cut rates as GDP growth rate for Q3 has come down to 4.5% and moreover RBI can take comfort in easing inflation below 7%. On debt side, we see G Sec yields coming down over next 1 year though there may be short term rise in yields because of shifting of some funds from G Sec to Bank CDs as tactical move. We recommend Bond Fund/ Income Funds for debt allocation with 12-18 months time horizon. Equity market will remain range bound for some time but outlook for FY 14 and FY 15 remains positive as corporate earnings will improve on the back of falling interest rates and improved outlook on Indian economy. On equity side we continue with our advice to invest through SIP/ STP mode in staggered manner.