Budget Expectations: The Union Budget What's in it for me?

With the Budget season approaching there are a lot of discussions and aspirations of what the Budget would have in store for us. However there are a few questions which most people have in mind like what exactly is the Union Budget? How is it going to affect me? Do I have to be happy or worried? How will it be affecting my lifestyle? Let's answer these questions.

Just like every household has an income and has its share of expenses so does the country. The country receives money by way of taxes and has a list of expenditures to be incurred which should lead to the benefit of the country at large. Just like we have planned and unplanned expenses in every house so also the country has a share of definite and unplanned expenses. In a household sometimes expenses off shoot our income and we either borrow money or take a loan. Similarly if the expenses of the government are more than the income it's called fiscal deficit and if incomes supersede the expenses we call it as fiscal surplus. We hope to see days when we are in a surplus situation.

Now coming to the question on how will the union budget affect us? Generally people look at the direct taxation and its implications on self, however it should not be forgotten that a major impact happens due to the incidence of indirect taxation as well. Direct taxes are the tax slabs which directly reduce your disposable income (e.g. income tax) indirect taxes come into play when we manufacture, sell or buy a product or service.  (E.g. excise duty, sales tax, service tax). Now let's understand these concepts and their effect on our lives.

1. Direct Tax: - As the name suggests this tax reduces the disposable income available in the hands of the individual. The effect of this is simple and directly affects your lifestyle and savings pattern. There are also exemptions which are certain specific investments done which reduce the extent to which you are taxed. These are basically done for people to inculcate the savings habit and to enjoy certain benefits like health insurance in the future.

2. Indirect Tax: - There are various categories of indirect tax

• Service tax - This is the tax charged on services rendered, which has to be collected from the clients and paid to the government. If these taxes increase there are increase in a plethora of expenses ranging from mobile bills, insurance premium, professional consultancy, property purchase from the builder, courier expenses, credit card bills etc. there are almost 125 services on which service tax is levied.

• Excise duty - This is the tax charged on manufacturing of a product. A change in excise duty can make a product dearer or cheaper. For e.g. an increase in excise duty in steel can make a car an expensive product.

• Sales tax: - It's the tax charged on sale of goods. An increase in the same will directly make the products more expensive for the end consumer.

Now let's understand how a government might function in a budget and how it can have an impact on us. Today our country is sitting on a huge fiscal deficit. Moreover we have various development projects to be implemented. To increase revenue the government has to increase its cash inflow. It can do that by increasing direct taxes, however it would lead to less disposable income which would in turn affect the economy as spending could reduce. It can do away with certain subsides but this is a very political decision. A high fiscal deficit leads to huge interest expense to be paid by the country and in short the money left for development becomes less. In order to raise money the country could propose disinvestment of certain psu's which could help in raising capital. However that too has its share of problems and risks.

But what does an average household need to take from this? Let's answer this question by understanding how the budget can have its effect on the following classes of people.

• House Wife: - The home maker as she is called today functions like the finance minister at home. If the subsidies are reduced / removed on cooking gas & diesel it would lead to increased cost of food consumption. This will straight away decrease the disposable income and might have an effect of life style of the middle income group families.

•  Students: - Education qualifications to a great extent shape the careers of our students. However today coaching classes and private tuitions have started having a major impact on their educational excellence. An increase in service tax in budget can cause an increase in the private tuition fees and make it more expensive for them. Today education expenses have really sky rocketed and parents have to really think twice before choosing an institute. Changes of this kind are sure to impact a student's future career path.

• Businessman / professional: - An easing in direct taxation slabs will amount to more surplus in the hands of professional and businessman. This can encourage and lead to further investments in their business and could lead to generate more employment and betterment of the society. However the effect could be negated by increase in indirect taxes like service tax, excise duty and sales tax.

• Salaried: - This year we are expecting the direct tax code to come into effect. There are various recommendations in this regards which could have a direct impact on the salaried individual. There could be a reduction in the tax exemptions from Rs. 1,00,000 to Rs. 50,000 and Equity Linked Savings Scheme as an investment class might not qualify for tax saving. This could deincentivize the salaried to invest more, though tax saving should not be the purpose of planning one's own investments. Moreover individual with housing loan who were claiming tax exemption on principal paid might not be able to claim it any longer.

• Retired individual: - It is proposed in DTC that the annuity part of the pension be made tax free. The pension product has two phases one being the accumulation phase and the other being the annuity phase. Removal of taxation on annuity part of pension plans will have a great impact on the surplus funds available with the individuals invested in pension plans.
The union budget is not in our hands but what is in our hands is the way in which we deal with it. So the first thing which a household needs to do is to have its own budget in place. The problem is not about the fixed and definite expenses but the variable which actually makes all the difference. Just like the union budget allocates money for projects we need to be sure on what will be our milestones and goals for which we need to allocate the required funds. It should keep an emergency provision which could be needed as things could become dearer and necessary. Finally it is important to review whether our proposed plans are actually meeting our targets. If not then we better review it.

A budget affects us in many ways but what is crucial is to be prepared and make our internal financial systems strong enough to manage adversities and gain in case of provisions conducive to us.

• NRI: An NRI having investments in India would be affected by the laws of taxation decided in the budget. For example, currently long term gains in Debt Mutual Funds for NRI's attract a TDS of 20% plus surcharge. Now if he falls in lower taxation slab he would have to claim refund by filing returns. An ease in the process could rope in more investments and an NRI would be more inclined to invest in India.

• Retail Investor: Like last year, the short-term capital gain tax was increased from 10% to 15%, any increase in taxation will not be a good sign for the retail investor. Also certain investment products in India have the EEE concept (Exempt, Exempt, Exempt) of taxation. If the EEE concept is changed to EET concept (Exempt, Exempt, Taxed) for such products, the retail investor would suffer as they will have to pay tax on their maturity proceeds in such investments.

Mukund Seshadri

MSVentures Financial Planners
www.msvfp.com