Biting the Budget bullet

However,the three sectors that matter most in an individuals personal finance are banks,mutual funds and insurance.

Bodies such as the Institute of Company Secretaries of India ICSI,the Institute of Chartered Accountants of India ICAI,the Indian Banks Association IBA,the Association of Mutual Funds of India etc recently made representations to the Finance Ministry and submitted their expectations on the budget. The recent report of the Standing Committee of Finance on Direct Tax Code has made several recommendations based on its interaction with the industry and respective associations.

Banks

Banks and financial institutions,in their meeting with the Finance Minister,suggested that there was a case for increasing the credit to GDP ratio in India which is one of the lowest in the world. While Indias savings rate is about 32 per cent,only one-third of it reaches banks.

The banking industry complained that there were several handicaps which it faces in mobilising deposits. The current tax rebate on five year FDs is not a good enough incentive for the investors when compared with the equity linked savings scheme of mutual funds,said bankers. The industry has demanded that the tax rebate on FDs should be reduced to three years. To ensure better fund mobilisation into long term savings,tax rebate on FDs must be brought down. Also,the exemption of Tax Deducted at Source TDS on FDs up to R 10,000 must be increased to at least R 25,000, said Jyotirmoy Jain,Advisor Banking amp; Finance,Associated Chambers of Commerce and Industry of India. The banking industry has also demanded that they should be allowed to issue tax-free infrastructure bonds. Currently,the tax deduction of up to Rs 20,000 is allowed on infra bonds over and above R1 lakh Section 80C limit. The requirement for special incentives for investors to invest in infrastructure bonds was also highlighted.

The ICSI suggested that there should be no TDS up to R1 lakh on income from professional or technical fees,royalty,non-compete fees etc. The IBA suggested the Standing Committee that there should be no TDS on any amount less than R 1 lakh which would substantially reduce compliance burden on the banks.

The Finance Ministry,however,disagreed with the suggestion of increasing the TDS threshold to R1 lakh but assured that it would consider increasing the current limit. The lower threshold limit prevents evasion of tax by opening time deposits in different bank accounts, the finance ministry replied to the demand.

Life insurance

The life industry seems to have the longest list of demands. The last two years have been particularly difficult for the life insurance industry due to fast-changing regulatory environment and key changes made by the regulator Insurance Regulatory and Development Authority IRDA. The proposed DTC is expected to hit the sector further. Under DTC,all proceeds/ benefits of life insurance policies are tax exempt subject to the condition of sum assured being at least 20 times the annual premium,as against 5 times the annual premium every year under the current provisions.

The committee recommended that increasing the tax exempt sum assured to premium ratio of 20 times is too drastic a change and it will have an adverse impact on the life insurance sector as such. The Committee would therefore,recommend a more reasonable multiple/ ratio of 10 times the annual premium,which will fulfill the desired objective of ensuring adequate protection in insurance.

The proposed DTC provides deduction of R 50,000 for life cover,health cover and tuition fees. The industry feels that the life insurance products may see a downside as amount of R 50,000 may be exhausted for paying tuition fee alone for kids. We suggest that limit should be increased and should be wholly and exclusively for life insurance products to a minimum of R 2 lakh, says Rajesh Sud,MD amp; CEO,Max New York Life Insurance.

However,the committee recommended that this limit R 50,000 may be increased to R 1 lakh so that all the above expenses are covered in a reasonable manner.

The DTC does not provide any specific rate of taxation for a life insurance company. Accordingly,the same is likely to be taxed at the general rate of 30 per cent for a company. A large chunk of funds of life insurance companies are invested in infrastructure projects of the country.

Also companies incur huge losses initially due to long gestation period of the sector. This will dissuade the promoters to invest in Insurance companies considering high risk and low returns, said Sud. We recommend charging concessional rate of tax on profits at the rate of 12.5 per cent.

The proposal to increase service tax to 12 per cent and introduction oftax on the maturity proceeds on maturity are some of the other concerns of life insurance industry which are expected to hit the consumers.

Mutual funds

Like the insurance industry,mutual funds MFs were also hit by the change in the regulatory environment,especially the abolition of entry load after which a large number of agents stopped selling MFs due to zero commission.

According to the proposed DTC,the equity-linked MF schemes would not get the tax benefit. Industry players feel that instead of removing ELSS from the list,the tax exemption limit must be further increased. The world over,equity cult has been built on tax incentives. For long-term equity culture,the tax limit should increase, says Sankaran Naren,CIO,ICICI Prudential Mutual Fund. Along with tax incentive,the drop in securities transaction tax STT would help the industry. The ELSS is a great way of investing in equity while saving taxes. Tax benefit on ELSS must continue, said Dhirendra Kumar,CEO,Value Research.

However,experts feel that given the state of the economy,the Finance Minister does not have much leeway to give too many tax sops to the financial institutions. Stark deviation in budgeted and expected numbers of fiscal deficit,divestment,GDP growth,government borrowings and subsidies for current financial year has made a mockery of the budgeting exercise weakening the credibility of the Finance Minister. In the coming Union Budget,market participants would not only like to carefully watch these numbers but also the approach to achieve stated numbers so as to regain some confidence in the sanctity of the budgeting exercise, says Aneesh Srivastava,CIO,IDBI Federal Life Insurance. Over to the Finance Minister.

ritukant.ojhaexpressindia.com

Key Budget Expectations

Banks: Remove handicaps in mobilising deposits; give tax rebate on 3 year FDs; increase tax exemption on TDS to Rs one lakh; no TDS on FDs upto Rs 25,000; banks should be allowed to issue tax-free infra bonds

Insurance: DTC provisions must not be implemented; tax exemption on sum assured which is 10 times the annual premium and not 20 times; R 50,000 limit under DTC too less,create separate section for insurance

Mutual Funds: Continue tax benefit under ELSS; increase the tax benefits on MFs,reduce the securities transaction tax.