Did Budget 2017 just do what demonetisation couldn't?

Some of the budget proposals will have a large impact on cash transactions

Abaneeta Chakraborty
Published: 06, Feb 2017

Abaneeta is the Founder of ABANWILL CONSULTANTS LLP, a firm that was formed to provide independent views on investing and make an impact in the field of Financial Services. She draws her inspiration to write on the subject of wealth management from her 16 years in the Industry where she has worked with Banks, NBFCs and a Multi Family Office. She is a qualified Finance professional. She has also independently developed a course called “Marketing of financial services” that is taught at the Praxis Business School since the last 5 years. Abaneeta can be reached at consult@abanwill.com

Long term capital gains on house property (now be eligible for ‘Long term’ in 2 years instead of 3) will be calculated with a new base year (2001 instead of 1981) (Image: Shutterstock.com)
Long term capital gains on house property (now be eligible for ‘Long term’ in 2 years instead of 3) will be calculated with a new base year (2001 instead of 1981) (Image: Shutterstock.com)

Budget 2017’s announcements seem to have a fair amount of follow on work related to the crackdown on ‘black money’ by the government. The dust of demonetisation has settled. There seems to be no definitive count of how much of the currency in circulation was unaccounted for. The ruling party has received enough flack for raking up the system like it did and then being unable to quantify the good that has come of it.

The budget is usually about a broad direction on government spending and collection of revenues. It is natural then, that market participants want to hear about changes in tax structures, government spending, industry benefits or the tightening thereof. Much of the focus is on being able to forecast what the health of the economy is now like, if the Reserve Bank of India will have room to cut rates, if government borrowing will balloon and many more ‘directional’ items. One may debate on whether there was enough of that in this budget but one thing is clear, some of the measures taken may have a larger impact on cash transactions than any taken lately.

Let us examine what just happened to the real estate sector. After all, it has been accused of being the biggest and the real creator of cash in the economy. First, long-term capital gains on house property (now ‘long term’ will be two years instead of three) will be calculated with a new base year (2001 instead of 1981). That will alter the cost of acquisition of properties significantly and translate into a huge saving in capital gains to be indexed and then taxed. As a seller, there is now an incentive to price one’s property closer to market price. This may impact the cash component in secondary market sales. Previously, one had to plough back one’s sale proceeds from property back into real estate to avoid taxes but this budget seems to have broadened the alternatives.

One very radical announcement has also been made. All this while, one could get a significant tax arbitrage by booking a second house or more, showing a loss between rent received and interest paid on the loan and adjust that loss against income earned. This had no cap, so one could book a large loss, carry it over for eight years and live happily. Budget 2017 has capped this loss to a total of Rs 2 lakhs per year. One hasn’t heard the end of this. To my mind, this is path breaking and will significantly affect investment sales of high-end properties.

Let us look at long-term capital gains on equity. By making only transactions that pay a securities transaction tax (STT) eligible for long-term capital gains tax exemption, a serious blow has been landed on people who misuse this rule by taking preferential allotment of bogus shares and rerouting them after one year. It’s a different matter altogether that this has created a frenzy in the private equity community and for employees with ESOPs and others who have legitimate ways of acquiring shares outside the exchange. Clarification is awaited on this and hopefully it will be in favour of legitimacy.

The finance minister has offered to the economy, a stable fiscal deficit, multiple social reform schemes, a boost to infrastructure spend and some special attention to the rural economy. But above all, Budget 2017 seems to have orchestrated the government’s recent cash ban theme. The above mentioned announcements, limits set on cash transactions, reforms in methods of political funding and supporting digitisation at the ground level are some such examples.

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