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GST done what next for Modinomics – Direct tax???

Post the traumatic experience of standing in queues for months to withdraw own money and tasting mixed fruits of increased/decreased prices due to GST India(especially Middle class) is looking forward towards the next reforms from Namo and Arun Jaitley. In the previous week GDP data for last quarter came and it was weakest in the last 3 years. Underlying reason for the weakness is weak demand and low utilization (~70%) of existing plants. Due to weak demand corporate’s are not setting any new plants despite increase in public spending by government.

Can NDA govt change this in the next 20 months? Perception is very important in politics. Today Narendra Modi has the image of a leader who is putting 24 hours a day to improve the India’s image and economy. Today Jaggi pointed out that we need a stimulus of 1-1.5 lakh cr to increase demand but remember helping banks (by recapitalizing) can help opposition in making “Suit Buit Sarkaar” again. So what is the other alternative? Simple Cut the Taxes both Direct & Indirect and let the money flow in the system to create demand. With demand inflation will be back and probably INR will depreciate in longer term to help Indian corporate in competing with rest of the world.

Let’s talk Direct tax first.

Last year Arun Jaitley told that we have 37 million Individuals IT filers in India.

Gross Income\Year 2013-14 2014-15 2015-16
0        1,55,501        2,28,627        1,98,216
>0 and <=2,50,000  1,47,75,316  1,44,82,520  1,35,16,945
>2,50,000 and <=  5,00,000      84,14,290  1,15,17,749  1,38,47,402
>5,00,000 and <= 5,50,000        8,67,289      11,94,171      13,78,870
>5,50,000 and <= 10,00,000      31,22,753      41,41,207      51,30,691
>10,00,000 +      15,90,449      20,21,020      24,40,910
Total  2,89,25,598  3,35,85,294  3,65,13,034

Or in other words Distribution look likes:

Gross Income\Distribution 2012 2013 2014
0 0.5% 0.7% 0.5%
>0 and <=2,50,000 51.1% 43.1% 37.0%
>2,50,000 and <=  5,00,000 29.1% 34.3% 37.9%
>5,00,000 and <= 5,50,000 3.0% 3.6% 3.8%
>5,50,000 and <= 10,00,000 10.8% 12.3% 14.1%
>10,00,000 + 5.5% 6.0% 6.7%
Total 100.0% 100.0% 100.0%

From this distribution we can categorize people in 3 different categories:

  1. Lower Middle class (People with Gross Income of <5 lakh)
  2. Middle class (People with Gross Income of 5-10 lakh)
  3. Higher Middle class & Higher class (People with income of >10lakh+)

My proposals are:

  1. Effective 0 tax for people with Gross Income of 5 lakh. This means you can’t claim 1.5 lakh as 80 C deductions. So effectively increasing 4 lakh slab (2.5 lakh+1.5 lakh) to 5 lakh. This is applicable specifically for lower middle class
  2. Creating a tax slab of 10% for 5-7 lakh targeting the middle class
  3. Introducing a new tax free bond of 50K (max) for infrastructure. But here the Interest rate would be 50 bps less to Govt bonds but will still give return of ~9% post tax for Higher Middle class/Higher class.
  4. Removing few exemptions like Medical bill (15000/yr) & Travel allowance (19200/year)

My proposals are tailor made for each category. Let’s see what will be the net effect of these changes:

Lower Middle class: This distribution tells us that almost 37.5% have gross income of less than threshold (2.5 lakh) and hence pay 0 taxes. Next category (2.5 lakh -5 lakh ) we have close to ~1.4 Cr (38%). Remember here we are talking about Gross Salary i.e Income before 80 C deduction of 1.5 Lakh. So effectively this set of people is going to pay tax on max 1.5 lakh (assuming 1 lakh average deduction i.e 2.5+1=3.5 lakh tax free). From this 1.5 lakh govt would be getting something like 10800 cr this year as tax (1.4 Cr people*1.5 lakh *.05*1.03) at 5% tax rate. Additionally govt gives a rebate of 5000 in IT under section 87A  if income is less than 5 lakh, which basically means govt would be getting only 7500 cr from these set of 1.4 Cr IT payers. So if we implement the 1st recommendation we are looking at loss of 7500 Cr to govt.

Let’s move to second category of Middle class:

We have close to ~65 lakh as IT payers in Middle class. Current bucket is 20% for Income b/w 5-10 lakh post 80 c investments. So govt approximately would be getting ~8000 cr as 5% tax from this Middle class IT payers. I am assuming that here people would be using the full 1.5 lakh exemption limit plus some additional benefits like 80D, 80DD, 80E or 80G. Based on these I am assuming average 50000 as tax which will yield ~33000 cr as Income tax.

If we introduce a new slab of 10% for 5-7 lakh than average tax will be reduced to 35000 which means a loss of another 10000 cr to Finance minister.

Increasing 50000 limit of new Infrastructure bond will nullify the effect of removing Medical bill & Transport allowance (34200).

For Higher Middle class & higher class:

This is the class which actually drives the personal IT collection of India. Also these are the people who drive the consumption in India in luxury space. Currently my estimation is that Govt collects 1.4-1.5 lakh cr from this category of people. If we implement all the recommendations than govt has to forego close to 12000 Cr due to new 10% IT rate. Removing exemptions will almost negate the new tax free infra bonds introduction.

So if Narendra Modi accepts these points and introduce them then the Finance department will lose ~30000 CR (7500+10000+12000). This forego revenue will surely effect the fiscal consolidation path taken by Modi govt but current need is to create demand in the economy.

Best way of communicating & achieving is not to wait till Jan 2018 PM should come back on National TV on 20 September (Just before the Festive season of Navratri starts) and announce new IT rates of next year. This will create the immediate spending spree with Middle & Higher class which can take back our growth to 8% in Q3.

 

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Time to change Direct tax laws

The Central Board of Direct Taxes (CBDT) on 19 August 2016 had placed a new version of the income distribution data for assessment year (AY) 2012-13.This data was the first since 1998-99. Also with rescheduling the budget session earlier Modi Government has already started preparation for next year budget. In light of these facts I would like to suggest some changes based on the data published by CBDT.

Major highlights of 2012-13 data were published in several papers/blogs so I am not going to repeat the same. What I am doing to discuss is the analysis which I have done on Section 2 Income Tax Returns – Individuals of the report.

On 28 Feb 2011 our Finance minister Mr. Pranab Mukherjee declared enhancing IT slabs by 20,000 for all categories which changed the IT slabs to the following:

Category Man <60 Yr Woman <60 Yr 60-80 Yr >80 Yr
0% 1.8L 1.9L 2.5L 5.0L
10% 1.8L to5.0L 1.9L to5.0L 2.5L to5.0L
20% 5.0L to8.0L 5.0L to8.0L 5.0L to8.0L 5.0L to8.0L
30% > 8.0L > 8.0L > 8.0L > 8.0L

 

But for sake of simplicity (as I don’t had breakup of male/female/senior citizen) I have done my calculations by taking following IT slabs (Deliberately taken 10L instead of 8L to align with current numbers)

Category All
0% Upto 2,00,000
10% 2,00,000 to 5,00,000
20% 5,00,000 to 10,00,000
30% > 10,00,000

 

From table 2.1 of Individual– Gross Total Income (AY 2012-13) from Income Tax Return Statistics for Assessment Year 2012-13 (version 2.0) it is evident that there were 2,89,25,598 Individuals returns filed.  Major points of my observations are:

  1. These 2.89 cr people (which were<3% of Indian Population) declared almost 12.15 Lakh cr as income.
  2. If there were no exemptions other than mentioned in IT slabs GoI would have got 1.55 lakh cr as tax revenue but instead they got 1.12 cr lakh cr (Table 2.11 Individual- Range of Tax Payable (AY 2012-13).
  3. The reason for this difference is the range of exemptions given by GoI. As of today an Individual can avail 22 different types of exemptions but majority of Indian salaried persons are not using it. There are many reasons of such behaviour. First and foremost is ignorance of such large number of exemptions. Second reason is that majority of salaried people (94.5% ) fall under salary bucket of 10 lakh which does not give incentive of putting up resources to avail all exemptions.
  4. Majority of people still avail section 80 exemptions for future savings, purchase of house, tution fees etc. If UPA -II would have removed all exemptions and increased exemption to 2 lakh in 2011 than also they would have collected 1.31 lakh cr as Tax (excluding surcharges). In addition they would have got support of atleast 2.73 cr Individuals (having gross income <10lakh) and their dependents.

For example there were 3 people in India who had income of more than 500 cr in 2011-12 and they had total Gross salary of 1,920 cr on which they paid 437 cr as tax while in No exemption scenario GoI would have realised atleast 575 cr. This shows that if you have good income you can probably pay less after hiring a competent CA.

Range No. of Returns Sum of Gross (cr) Average Gross (lakh) If no exemptions (cr) With 1 lakh limit Exemption (cr) With 2 lakh limit Exemption (cr)
< 0 155501 0 0
>0 and <=1,50,000 30,13,171 25,679                         0.85 0 0
>150,000 and <= 2,00,000 73,61,219 1,32,623                         1.80 0 0
>2,00,000 and <=2,50,000 44,00,926 97,667                         2.22                   964.85                                 –
>2,50,000 and <= 3,50,000 47,92,311 1,40,556                         2.93               4,470.98                                 –
>3,50,000 and <= 4,00,000 14,11,154 52,758                         3.74               2,453.49                    1,042.34
>4,00,000 and <= 4,50,000 11,84,934 50,260                         4.24               2,656.13                    1,471.20                         286.26
>4,50,000 and <= 5,00,000 10,25,891 48,669                         4.74               2,815.12                    1,789.23                         763.34
>5,00,000 and <= 5,50,000 8,67,289 45,415                         5.24               3,011.98                    2,144.69                     1,072.34
>5,50,000 and <= 9,50,000 29,70,300 2,07,009                         6.97             20,609.70                  17,639.40                   14,669.10
>9,50,000 and <= 10,00,000 1,52,453 14,858                         9.75               1,904.43                    1,751.98                     1,599.52
>10,00,000 and <=15,00,000 8,22,430 99,029                       12.04             28,063.84                  27,241.41                   26,418.98
>15,00,000 and <= 20,00,000 3,02,371 51,905                       17.17             14,966.76                  14,664.39                   14,362.02
>20,00,000 and <= 25,00,000 1,56,984 34,972                       22.28             10,177.63                  10,020.65                     9,863.66
>25,00,000 and <= 50,00,000 2,05,342 68,695                       33.45             20,197.82                  19,992.47                   19,787.13
>50,00,000 and <= 1 cr 66,632 45,364                       68.08             13,475.94                  13,409.30                   13,342.67
>1 cr and <=5 cr 33,928 61,052                    179.95             18,247.74                  18,213.82                   18,179.89
>5cr and <=10cr 1,826 12,375                    677.71               3,708.85                    3,707.02                     3,705.20
>10cr and <=25cr 729 10,635                 1,458.78               3,188.89                    3,188.16                     3,187.44
>25cr and <=50cr 128 4,225                 3,300.95               1,267.31                    1,267.18                     1,267.05
>50cr and <=100cr 50 3,467                 6,933.71               1,039.96                    1,039.91                     1,039.86
>100cr and <=500cr 26 5,154              19,821.65               1,546.04                    1,546.01                     1,545.98
>500cr 3 1,920              63,997.96                   575.98                        575.97                         575.97
Total        2,89,25,598       12,14,287         1,55,343.42              1,40,705.12               1,31,666.41

After going through one year data we can’t actually judge the quantum of effect of removing exemptions but my suggestion to Mr. Narendra Modi and Mr. Arun Jaitley is to remove exemptions slowly for Individuals as well and replace it with flat exemptions. As a first I would suggest remove MEDICAL REIMBURSEMENT (15000) & Transport TRANSPORT ALLOWANCE (19200) and increase IT slab by 50,000 to INR 3,00,000 or increase the 80 c limit. The rationale behind for this proposal is bitter truth that most of the people produce fake bills to realize these kinds of exemptions.

Green Cess On Petrol & Free Cars

At the offset of this article I would like to ask how many of you (readers) want to buy a car for which Government will pay the running costs for let’s say 5 years. The cost of car is roughly the same as Maruti CNG Celerio CNG (Approx 5-6 lakh on Road). You only need to pay for car and maintenance cost which will be quarter of existing petrol/diesel car. Only condition is that you can drive 100-120 KM per day. I can bet 80-90% middle class Indians will take this offer as running cost of Petrol car (driving 1000 KM/Month ) is 5000-6000 per month which means in five years you can save 3,00,000-3,60,000.

So is it really possible for any such car to exist. If Government of India want then certainly we can have 2,50,000 such cars per year for next 20 year in such a scheme. You would say I am joking but I am serious. Let’s take the idea given by R Jagannathan of putting a green cess on Petroleum products forward. If Government puts a green cess of Rs 1 on every litre of Petrol then they can raise 1500 Crore Rupees every year which can install 200 MW solar power. These 200 MW solar power will give approx 320 Million units annually which in turn are enough to run 2,50,000 electric cars 12000 KM annually. For electric cars running per 10 KM you need 1 unit of electricity. Solar panels exist for 25 years so these 200 MW power stations can actually make 12,50,000 cars with zero operating cost for five years.

Basically you buy a electric car (like E20) and government will reimburse the cost of driving i.e electricity to all the users. Monitoring of the monthly electricity consumption can be done remotely which is fairly easy by the existing servers of E20.

Zero operating cost is not the only benefit of this scheme. We will have 2000 manufacturing jobs along with reduction of CO2 emission by 79,360 tonnes yearly. Also with these cars we will be able to save precious forex for India.

If NDA government launch such scheme then we can have 1 million such vehicles by 2019 and a much non polluted air.

Out of Box solution for UP power crisis

Last few days in India we are listening to a lot of noise in respect to severe power crisis in UP. Though this is not a new problem but any media/public attention is welcomed. After 16th May we are suddenly seeing a new era of hope has begun. The whole credit belongs to a person which we know as Mr Narendra Modi. Ministers have started working overtime and dysfunctional government machinery has suddenly started working. Also Mr Modi in his ten point agenda asked for out of box thinking for solving the common problem so I am putting down my idea for solving UP power crisis. I am proposing this solution based on my experience of making my home self reliable in electricity. Also I would like to acknowledge that since I am not energy expert this solution can have shortcomings and any comments/suggestions are most welcomed.

Present Scenario in UP:

The electricity deficit is close to 2150 MW in UP. Given the magnitude of the shortfall rural areas are facing power cuts of over 15 hours; the district head quarters with 10 hours power cut & the major towns have outages up to around four hours.

Power demand is increasing by more than 8% every year in UP while the state government is not able to add single MW in 2013-14 to the existing generation capacity. So in coming years this problem is going to get bigger and bigger unless some drastic decisions to improve power supply.

UP have 97942 villages with a population of 156 million and urban population of 44.4 million. Though on paper 96850 villages have been electrified as of 31 March 2013 but in reality 76 % of rural household were still dependent on Kerosene for lightening (census 2011). Given the census data is 3 years old we can assume that this figure would have reduced by 10% (highly optimistic) which still give figure of 65-66% dependency on kerosene.

In terms of absolute number a staggering 19 million families are dependent on kerosene for lightening while only 6 million families are dependent on electricity.  Now anyone can imagine the scale of the problem which we are facing.

If all these facts are correct then what is the solution of this increasing demand supply mismatch. As Thomas Edison famously quoted “I’d put my money on the sun and solar energy. What a source of power! “ . The time has come when solar power would be taking centre stage in solving the problem of energy security in India. On the similar line of “Saffron Revolution” quoted by Mr Modi himself Solar is the solution of the UP Power crisis.

Solution for Power Crisis:

We can solve the part problem of a rural family by distributing a 60 W solar panel with 2 DC fans and 1 Solar LED battery. The cost for this setup will be Rs 4300 (60*45+2*400+800) per family. The reason for 60 W is that it is sufficient for a family of 5 to supply 2 DC fan (6-7 hours) & 4-5 hours of LED light. For these 19 million families the cost will be close to 8218 Cr. Given the huge scale of economics the cost of this whole programme can be reduced to 8000 Cr.

But who should take the responsibility of the last mile distribution. The solution of this puzzle lies again in Gujarat but this time it’s not Modi. It’s the Super Modi aka Sardar Patel under guidance of whom local farmer leader Tribhuvandas K. Patel formed a cooperative and supplied milk directly to the Bombay Milk Scheme. With the time cooperative movement spread across the villages and now known as AMUL. The time has come for use of cooperatives/Self Help Group in Distributing/selling solar modules directly to the rural population.

Cooperatives have edge on private companies in social related works as private companies tend to maximize the profits on the urgency clauses while cooperatives/gram panchayats ensure that material reaches to the needful person.

First government needs to make solar banks on a zone level across Uttar Pradesh from which the District/Taluka level cooperative can coordinate for drawing the solar modules. From the Taluka level we can have small sub solar banks which can distribute to village level cooperatives. All the procurement & selling should happen at no profit no loss principle.

Best part of this whole programme is the time to complete the whole process. My understanding is that if GoI/UP government wants than they can solve this entire problem of electricity in next 6 months. As a matter of fact coal plant needs atleast 5-6 years to come up, a nuclear power plant 7-8 years and a hydropower plant takes atleast 10 years. Also the solar modules will help us to reduce the pollution by not setting up new coal mines/gas wells.

The whole solar module distribution would amounts to 1.2 GW which is little greater than last year solar generation capacity installed in entire India. This new demand will help in increasing the indigenous manufacturing of solar modules & LEDs.

Now this scheme has two major short comings: Cost & Reliability.

On a first glance the cost of the whole programme looks huge as this solar modules work only in daytime that also on a cloud free day.  But we can see this expenditure as a cost of empowerment to people which gives the UP government a flexibility to supply 24&7 power to all other areas without power cuts. Also after the closing hours of factories, offices, shops i.e off peak hour’s electricity can be supplied to these rural hamlets as these are officially electrified. To recover 8000 crores distribution companies can put a surcharge on the 24&7 supply. Industries, offices, shops & residential people would be more than happy to pay a little costly but regular electricity.

Also it will help in reducing the T&D losses of the distribution companies as the whole model is decentralized which reduces the distance between the generation & consumption point.

Overall I believe this is a win win situation for both people & government.

P.S: As I have said in the start this is based on my experience. I started in 2012 with a 60 W solar module and last year I increased it to 360 W. My village is in UP with 18 hours load shedding but my family enjoys the benefits of electricity. Seeing my initiative already 5 families have installed solar panel on their roof and I am sure in coming years my whole village will be solarified.

“The amount of sunshine energy that hits the surface of the Earth every minute is greater than the total amount of energy that the world’s human population consumes in a year!”