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FBT should be abolished: Lotus AMC

Published on Tue, Feb 19, 2008 at 11:27 | Source : Moneycontrol.com

Updated at Thu, Feb 21, 2008 at 18:11

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Over the years, the Union Budget has become a non-event, with most policy actions taken outside of it. As such we don't expect much more than a mildly positive budget.

A. Overall the macro economic picture is buoyant, with 8.6% economic growth for the last three years, this years GDP growth forecast at 8.7% and a forecast of 10% economic growth in the 11th Plan. The tax collections of the GOI have hit a lifetime high number with a nearly 40% plus growth. This has given the Finance Minister the leeway to look at giving individuals and corporates some tax relief.

B. It also gives him the opportunity to increase the allocations to the key thrust areas of agriculture, education, rural development, infrastructure, employment generation and urban renewal.

C. The main contributor to market stability is regulatory maturity and policy continuity and stability. We hope that the budget contributes to that with a stable, continuity oriented and practical budgetary statement, given all the constraints of coalition politics.

Key objectives of the Budget to our mind will be:

Inclusive Growth agenda
Economic Growth with strong emphasis on debottle-necking the economy
Relief to export oriented sectors
Maintaining the FRBM targets
Providing relief to the urban middle class through tax concessions
Targeting subsidies better
Focus on agriculture, education, healthcare and rural development

Mutual Fund Wishlist:

Policy continuity and stability are critical for market health. We expect the following:

Sec 115(O), II5 R and 115 T should be amended to:
i. Bring Equity Fund of Funds, International Equity Funds, Gold ETFs under the definition of Equity Mutual Fund
ii. Dividend Distribution Tax on Corporates and Equity and Non Liquid Mutual Funds should be reduced to 10 % from 15% at present
iii. Dividend Distirbution Tax on Money Market and Liquid Mutual Funds should be reduced to 10% from 25% at present
Capital gains and STT levels should be held steady.
REITs should be treated as Equity mutual funds in all aspects
Overseas Investment Limit for individuals and international funds both should be lifted completely
Sec 80 C deduction level should be raised from Rs 1 lakh to Rs 3 lakhs
Dedicated Infrastructure Funds guidelines should be issued so the huge infrastructure funding requirements can be met.
Commodity ETFs should be introduced
Self Regulated Organisations in Capital Markets should be formalized
Short selling and stock lending and borrowing guidelines should be formalized.

Other Expectations:

[1] Fiscal and Revenue Deficits contained, FRBMA targets on track

Fiscal deficit at 3.3% and Revenue at 1.5% of GDP is well within the targets and will help enhance the sovereign ratings. More funds will be available for other borrowers .The maintenance of overall fiscal prudence while maintaining enhanced expenditure on key sectors is a well-balanced act that needs applause.

[2] Tax Provisions

a) Personal Tax rates can be reduced, with the zero tax limits hiked, especially for senior citizens and women. Some sort of standard deduction must be allowed to all individuals in the light of the high consumer inflation we are seeing.
b) Sec 80 C and Sec 24 limits need to be hiked to allow individuals to get more rebates for buying their own houses.
c) Surcharge should be removed on personal income tax payers .The cess of 2% plus 1% should also be removed.
d) FBT (Fringe Benefit Tax) is garnering over Rs 5000 crore, but it's a cumbersome tax that has added to compliance costs across the system. Especially FBT on Business Travel, on sales promotions and on ESOPs needs a re-look. FBT should be abolished.

[3] Export Sectors Sops

Textile sector, the second biggest employer in the country is reeling and needs immediate support in the form of enhanced TUF support and subsidies. We expect a package on this front.

For software companies, the policy announcements on the STPI scheme post 2009 will be watched, in case the government decides to extend this, the sector will rally strongly. The negatives are already built in, so a lack of extension will not impact the sector negatively.

[4] Other Sectors

Auto will seek a reduction in excise duties and enhanced allocation to road infrastructure.
IT will seek clarity on the STPI scheme post 2009.
Pharma will seek R&D expenditure deduction incentives at 150% under Section 35 to be extended for a period of 10 years at least as these are long gestation expenditures.
Construction companies will seek clarity on Sec 80 IA provisions.
Food processing companies will seek some tax relief as well.

In Conclusion:

We expect the thrust to remain on agriculture, rural employment generation schemes, and infrastructure across roads, ports, airports, power, telecom, education and health care.
We expect some efforts to target subsidies more efficiently.
FRBM targets will be met; hence there is scope to give some corporate and personal tax rate reliefs.
FBT abolishing will be a huge positive for the markets.
For Real Estate, we hope Sec 80 C and Sec 24 benefit amounts will be enhanced.

However given the coalition based polity, expectations are muted. We will at best get a mildly positive policy statement.

- Ajay Bagga, CEO, Lotus India Asset Management Company.

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