New Delhi: The BSE Sensex has got its bounce back, ironically after giving thumbs down to the Union Budget on Monday and closing nearly one per cent lower. On Tuesday, it closed 777 points higher, its biggest single-day point gain in nearly seven years.
The reason for cheer is the expectation that Reserve Bank Governor Raghuram Rajan will announce an out-of-turn reduction in repo rate. Rajan had last cut interest rate in September. The rupee also rallied, rising to 67.86 per dollar, while bond yields inched lower for the third consecutive day. The buzz about a rate cut was also rooted in Finance Minister Arun Jaitley retaining the fiscal deficit target at 3.5 per cent of the GDP despite increasing expenditure for rural and infrastructure spending. The gains were led by rate sensitive banking stocks, which rallied 8 per cent. ICICI Bank, Punjab National Bank and IndusInd Bank were among the top Nifty gainers.
This is the most visible positive reaction to the union finance minister Arun Jaitley’s roadmap for fiscal prudence with enhanced outlays for key sectors in 2016-17. But there was one hassle. The middle class – salaried segment of the economy — is jittery over the finance minister’s proposal that 60 per cent of the withdrawal on contribution to employee provident fund made after April 1 this year will be subject to tax. (This would apply to superannuation funds and recognised provident funds, including EPF.)
Stunned into silence by the Budget
The government on Tuesday seemed to be wilting under the all-round attack and promised to consider demands for a partial rollback of the proposal. Meanwhile, the babudom went into a tizzy under this onslaught and initially Revenue Secretary Hashmukh Adhia said only 60 per cent of interest on contributions made after April 1, 2016, will be taxed and that the principal amount of contribution will remain untouched at the time of withdrawal. However, in the evening a government press note said a proposal to tax only interest and not principal is under consideration.
In a damage control mode, the government said that the new tax proposal was aimed at taxing only the high salaried individuals — about 70 lakh people out of the 3.7 crore employee provident fund members.
The others — about 3 crore individuals — come under the statutory wage limit of Rs 15,000 per month who will not be affected by the proposed changes. The social media, however, mocked at this limit of Rs.15000 per month pointing out that this is less than the earnings of drivers and peons in the corporate sector.
NDA buoyed up by pro-farmer budget
But the final word would actually come from the finance minister himself, most probably when he responds to the debate on the budget in Parliament. A finance ministry statement acknowledged: “We have received representations today from various sections suggesting that if the amount of 60 per cent of corpus is not
invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.”
The bad news on the PF front is actually an added blow to the expectations of the salaried class that has been looking for some movement towards the redemption of the BJP’s election promise that the exemption limit for the income tax would be raised to an annual income of Rs. 5 lakhs.
