It is not possible for me to indulge in financial profligacy without adequate resources,” said the acting Finance Minister Pranab Mukherjee, brushing aside criticism that the government was not doing enough to overcome the slowdown. However, the government recently announced a 2% cut in excise duty and service tax rate to put some money into individual wallets and to boost consumer demand.
The general excise duty has been reduced from 10% to 8%, and the rate of service tax cut from 12% to 10%. Also, the 4% excise duty cut announced in December 2008 will now continue beyond 31 March 2009. “The amount of money in the system is the same, but with this measure, the government has shifted some amount from its own reserves to the taxpayer’s wallet. This should spur demand,” says financial planner Rohit Sarin.
While the excise cut, if passed on to consumers, will mean that the prices of consumer durables, steel products and cars will come down marginally, it is the reduction in the service tax rate that will bring direct relief. Processing charges on loans and credit card transaction costs could witness some reduction as they include a service tax component. Consumers can also hope to save on outgoings on mobile recharge vouchers, direct-tohome packages and operating systems software..
For investors, risk premium charges for insurance policies, brokerage charges on securities and transaction costs on mutual fund investments will see a marginal reduction because all of them include a service tax element as well. “The cut in service tax will have a much wider impact,” says Sarin.
Will these tax cuts impact overall expenses? The indirect taxes contribute 6-15% of average monthly spending. Considering a typical taxpayer (between 28 and 35 years, living in a metro, with a family of three), we asked experts to work out a spending pattern and average applicable indirect taxes. The result: the minimum gain for someone earning Rs 5 lakh annually will be to the tune of 10%. These gains are more pronounced as income, and therefore spending, goes up (see table).
| What you save after tax cuts How much money does an average person save (on an annual basis)? | ||||
| Average* indirect tax (%) | ||||
| Expense heads (Routine) | Expense (Rs) | Previous | Now | Savings |
| Food | 72,000-1,20,000 | 12.5 | 10 | 1,800-3,000 |
| Housing | 1,80,000-4,80,000 | 7 | 7 | 0 |
| Health | 1,500-25,000 | 8 | 6 | 30-500 |
| Transport | 25,000-60,000 | 12.5 | 10 | 625-1,500 |
| Education | 8,000-35,000 | 3 | 3 | 0 |
| Clothing | 5,000-20,000 | 12.5 | 10 | 125-500 |
| Durables | 3,500-25,000 | 12.5 | 10 | 87.5-625 |
| Entertainment | 10,500-60,000 | 15 | 12.5 | 262.5-1500 |
| Others | 12,000-75,000 | 7 | 7 | 0 |
| Non-routine | ||||
| Ceremonies | 10,000-55,000 | 10 | 10 | 0 |
| Medical | 3,000-15,000 | 6 | 6 | 0 |
| Education | 2,500-8,000 | 3 | 3 | 0 |
| Travel | 20,000-75,000 | 8 | 7 | 200-750 |
| Total | 3,53,000-10,53,000 | 3,130-8,375 | ||
| Average saving from rate cuts: 10% Figures are indicative. Actual tax may vary depending on income components. Actual indirect tax rates may vary considerably subject to actual component of expenditure, state and facts of case. | ||||
Will these measures induce people to spend more of what they’ve saved? “This will put additional income in the hands of the consumer. However, their impact on consumer demand will be limited,” says Hitesh Agrawal, head, research, Angel Broking. Experts believe that given the uncertainty over retaining jobs, consumption will remain tardy and the increased money will be saved. “These measures will mean that prices won’t go up,” says financial planner Brijesh Dalmia. That’s something, but a spending boost it isn’t.
- Rakesh RaiWatch thyself
It’s not just the companies, but regulators too who face flak for not investing surplus funds according to rules. The capital market and insurance sector regulators, Sebi and Irda, are flouting Finance Ministry instructions by parking surplus funds outside the government accounts, according to the Comptroller & Auditor General of India (CAG).
These funds are generated through fee charges and penalties. In 2005, the Finance Ministry had directed that the funds of regulatory bodies be maintained in the public account. In its report on Union government accounts for 2007-8, the CAG says that as much as Rs 1,325.49 crore was parked outside the government accounts. Sebi’s share was Rs 987.95 crore, while the balance Rs 337.54 crore was Irda’s. “The retention of funds by Irda and Sebi outside the government accounts is not only violative of government instructions, but also inconsistent with constitutional provisions,” says the CAG report.
- Rakesh Rai
| Word’s Worth |
| “Shares of companies are bought and sold by investors of their own choice...the government has no plan to financially assist investors or companies.” — P.C. Gupta, Minister for Corporate Affairs, refusing compensation for Satyam investors “The growth rate could go to 6% or less, but not to minus 12%, as in Japan.” — Amartya Sen, Nobel Laureate “It’s in urban India that people are uncertain and timid. If the benefits are passed on, it will stimulate demand in urban India as well.” — P. Chidambaram, Union Home Minister “Those who will survive will survive, those who will not, will fail... Each company has to find its way of sustaining itself.” — Ratan Tata, Tata Group Chairman, on Tata Group companies Source: Business Line, Business Standard, NDTV Profit |
Silver Streak
Despite the gold prices rising since the beginning of the year, silver has outperformed the yellow metal. Its prices have risen by 24%, while those of gold peaked at over Rs 15,000, translating into a gain of only 14%. Investors have been lured by growth in bullion prices, particularly since the global recession has taken the shine out of stocks, real estate and bonds. As stocks have lost value, the trajectory for silver and gold prices has been similar. “When gold prices go up, silver prices shape up accordingly,” says Assocham secretary general D.S. Rawat.
Unlike gold, which has seen steady growth through 2008, silver prices saw a sharp drop from a peak of Rs 27,000 per kg in March 2008 and are just recovering, says Angel Commodities research head Amar Singh. iShares Silver Trust, the world’s largest silver-backed exchange-traded fund, saw its holding rise by 153 tonnes in just four days this month.
Still, a recent report by Assocham expects the rally to last till August 2009, when prices are expected to peak at Rs 24,000. By January 2010, they are projected to slide to Rs 17,000. The reason is simple: by then, the financial meltdown is expected to stabilise, which will encourage investors to rebalance their investment plans for bullion and other asset clasees as well.
- Tanvi VarmaCentral Rules
Online shopping with credit or debit cards will become safer from August 1 this year. The Reserve Bank of India has directed banks to ask customers for additional validation for online transactions based on information not visible on the cards. Customers will also have special passwords for Web shopping, and will get online alerts from banks for purchases of Rs 5,000 and above.
RBI has also set a time limit of 12 days for banks to reimburse to cardholders the amounts involved in failed ATM transactions. “In many cases, the time taken by banks is as much as 50 days,” says Apnaloan’s Harsh Roongta. Banks must also take into consideration debit and credit transactions, as well as third-party transactions, to classify an account as ‘inoperative’. RBI has said there should be no charge for activation of an inoperative account and unpaid FDs should get interest at the savings rate.
| RBI’s Directive to Banks |
- Interest on inoperative savings bank accounts too. - Unclaimed FDs to get savings bank interest rate. |
- Rakesh Rai
Small Wonder
For parents, the need to safeguard their child’s future is probably their most important decision. The sensible move is to take a two-pronged approach—life cover and return generation—on investments for at least the first 15 years. The first will protect his or her future in case of an untimely demise of the parent; the second is accomplished through a longterm investment strategy that will take care of the rising cost of higher education and the child’s marriage.
Your Scholar from Aviva is a comprehensive child plan that promises all this with attractive returns on maturity. The plan pays a sum assured up front in case of parental demise or in case of a critical illness. Additionally, all future premiums are waived off. It also provides for regular income for the child till the age of 17. “This plan will ease the parent of all financial worries for their child’s higher education, marriage or setting up of a business,” says Aviva Life Insurance CEO and managing director T.R. Ramachandran.
This plan comes with flexible options, such as variable premium paying tenure, five fund options, riders that guarantee continuity of the policy in adverse conditions, and top-up facilities that allow policy accumulation to be bolstered with each passing year. One can sign up through a simple health declaration without tedious medical tests. The systematic transfer plan allows transfer of contribution between equity and debt as well.
| Early Start |
| Entry age: Parent (18-50 years); child (0-17 years). Policy tenure: 10-25 years, with maximum maturity at 70 years. Premium paying term: 3 years, 5 years or equal to the policy tenure. Annual premium: Rs 15,000 if policy tenure and premium paying term is the same; for 3- or 5-year tenure, Rs 50,000 is the minimum sum assured. Top-up premium: Minimum Rs 1,000 and maximum up to 25% of regular premiums paid. Riders: Accident death benefit, income benefit and comprehensive health benefit riders. |
— Narayan Krishnamurthy
