Keki Mistry- Vice Chairman and Chief Executive Officer, HDFC says, he expects some changes in the income tax norms in the upcoming Budget but is unsure whether tax rates will be re-jigged or the tax slabs will be changed.
Mistry believes it is important to increase the tax exemptions on home loans and even a marginal increase will pep up the home-buyers sentiments.
Considering the increase in house prices has been significantly higher than increase in exemptions, even a little raise of about Rs 50,000 will go a long way in improving sentiment, he says.
On the possibility of the Reserve Bank cutting interest rates if government sticks to fiscal deficit target, Mistry says, interest rates are high, as is the trend for this time of the year, and he expects rates to decline gradually in the near term.
HP Ranina, Senior Advocate of Supreme Court believes a cut in corporate tax rate is most likely as the government will try to achieve its targeted 25 percent rate over its remaining term.
Ranina expects phase-out of certain exemptions and reduction in weighted deductions, maybe on scientific research and development and few others.
Below is the verbatim transcript of Keki Mistry & HP Ranina's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Sonia: If the personal income tax slabs are raised then what do you think the impact could be overall, not just on sentiment but on demand as well?
Mistry: It depends on how these slabs are raised. There are two ways of doing it. One, reach a slab, so you keep same tax rate and just lower the plans within each slabs and the other way to do it is to increase the minimum tax limit and have a minimum tax threshold increase, which could go well because it would be more t it would mean more savings in the hands of people and savings ultimately lead to consumption. Consumption ultimately leads to demand and demand ultimately, in the medium-term leads to investment.
Sonia: There is also a hike in home loan rebate that is likely to come about. Do you think that will help revive the housing market?
Mistry: Yes, I think it is very important. Housing market, if you look at house prices, the way house prices have increased over the last decade, and the way the exemption has increased, exemption has also increased. But the increase in house prices has been significantly higher than the increase in the tax limits. So, the exemption needs to be raised. Ideally, it could be raised to Rs 5,00,000, but that is a tall order, so I do not think they can do that. But, even if they raise it a little bit, say Rs 50,000, it can go a long way in improving sentiment.
Latha: That is what our correspondent is picking up from the grapevine, a re-jig of the income tax slabs to alleviate tax pain for the lowest bracket, as well of course, the Finance Minister’s statement of bringing down corporate rates. We have not picked up anything on that front, but do you expect that as well? A cut in corporate tax rates?
Ranina: A cut in corporate tax rates was announced by him, as you know, from 30 percent to 25 percent over the next five years. Now, the question is whether he will do it to bring it down to say 29 percent for the assessment year 2017-2018, that is financial year 2016-2017. That remains to be seen, but I think he will because, he has now only three years left. He has promised on bringing down the rate to 25 percent and in the year, 2019, he will have to start doing it this year itself. So, I am expecting a one percent cut this year, in corporate rates of taxes. And obviously, some of the exemptions will be phased out. So, that also will be announced in this year’s Budget.
Latha: Which is the most likely exemption he may phase out?
Ranina: Some of the exemptions he will say that whatever is the sunset clause, those sunset clauses will remain, they will not be changed. He himself has said that he wants the sunset clauses to remain so that there is more economic activities done immediately. People in the country tend to put off things saying that the sunset clause is going to be extended when the time comes. But this time, he is going to give a warning saying that he is not going to extend the sunset clause. So, the incentive will come to an end on the day on which the sunset clause comes into existence.
But some of the other things, which he will raise is that weighted deductions which he has given, for example on scientific research where there is a 200 percent deduction on research and development (R&D), he may cut that to 150 percent or even 100 percent. So, you start by removing the weighted deductions immediately.
Latha: I wanted to ask you, going by the Reserve Bank’s behaviour last time, if the deficit is kept at 3.5 percent, that is good behaviour on the part of the government, they normally follow it up with an unscheduled rate cut. If you got this combination of a lower than estimated fiscal deficit and a rate cut from the Reserve Bank, do you see rates going down from lenders like you?
Mistry: I would believe rates would go down. Rates are high at the moment. As I explained to you once before, it is largely because of the time of the year. Advance tax payments, a lot of money gets pushed aside, people do not use that money, government stops spending. So hopefully, as liquidity enters the system, rates could come down which could help home buyers coupled with the increased tax deductions on housing loans, if that happens.
Latha: So, RBI cuts on March, 1, you will cut on April, 1?
Mistry: I cannot promise you that.
Latha: Is that how it works?
Mistry: It does not work like that. It does not work because RBI cutting rates last time did not result in a significant reduction in bond rates. Bond rates spikes. So, it is a function of liquidity. It depends on how much liquidity there is in the system. If there is enough liquidity, which is infused, even if RBI does not reduce rates then there is a larger chance of rates coming down than with a rate cut.
Sonia: You had spoken about an idealistic home loan rebate of about Rs 5,00,000. That would be a bit unrealistic.
Mistry: Very aggressive. I am not even saying that is likely.
Sonia: So, what is likely according to you?
Mistry: I would say a raise of about Rs 50,000 over the current level is probably more like it. But we must bear in mind the fact that the government has a lot of expenditure this year. We have to revive the rural economy, number one. Number two, we have to revive the investment cycle, so government needs to spend money on investment, you need to revive housing, you need to spend money or give these incentives and you have to capitalise public sector banks and markets are not very conducive to sale of PSU units, given where markets are. So, where is the money going to come from?