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Union Budget 2019. What Does It Mean ?

Posted on 05-Jul-2019 Comments  0

Union Budget 2019

What does the budget mean for Indian companies?

The budget has broadly laid out the roadmap for moving to $5 trillion GDP by 2025 and then to $10 trillion GDP beyond 2030. This opens up a huge business opportunity for India Inc that will exist irrespective of the specific budget announcements. Here are key corporate takeaways from the budget.

Public shareholding hiked

The proposal to raise public share holding from 25% to 35% will matter to companies with promoter shareholding in excess of 65% and there are more than 1400 such companies in India currently. This is still a proposal to SEBI and not yet ratified by the regulator. It also remains to be seen if this will be done in a phased manner, as is most likely. Companies may look to financial engineering products like participating preference shares to get around this requirement. We will have to watch!

Taxation on buybacks

This is again relevant to cash rich companies which use the buyback route rather than paying dividends. A lot of IT companies have adopted this route to pay lower tax than dividends. The budget has sought to remove this tax arbitrage by taxing buybacks also at 20%.This will discourage companies from opting for buybacks as a more tax efficient route. Companies could now become keener about paying cash dividends to shareholders.

Big boost for banks and NBFCs

Banks and NBFCs continue to be the pivot of the Indian corporate scene as they jointly account for nearly 40% of the Nifty market capitalization. The budget has allocated Rs.70,000 crore for bank recapitalization and that will be positive for PSU banks that have the NPA checks and the balance sheet size to expand their asset books. The first signs of NBFC regulation were also there with housing finance companies (HFCs) being brought under RBI regulation rather than NBH regulation. The much talked about line of credit for NBFCs will ensure that the solvent names will not be stuck for liquidity. Above all, the RBI regulating HFCs will bring in more transparency, not to forget the extra tax benefits for affordable homes. Overall, banks and NBFCs have reason to be happy from a long term perspective.

Over to Electric Vehicles 

The budget has given a fillip to electric vehicles. Firstly, there will be the duty-free import of parts and equipment that will be permitted for EV companies. Secondly, the GST for Electric Vehicles is likely to be reduced from the current 12% to 5% to make them more affordable. Lastly, in an innovative move, the budget has also promised income tax exemptions on interest paid on EV loans. In a nutshell it is a big boost for the EVs. Now the onus is on the auto companies to go green!

Union Budget 2019 

What does the budget mean for investors and capital markets?

Investors had big hopes that the LTCG tax may be rationalized on equities or removed altogether. However, the government has chosen to maintain status quo on this subject. However, there are some positives for investors.

Quality paper float

While the decision to increase public shareholding from 25% to 35% is yet to be finalized, it is likely to be a big boost for investors. Nearly Rs.4 trillion worth of fresh equity will come up as float in the market and that will reduce the froth of too much money chasing limited paper. The first big bull market in the 1980s was triggered by FERA companies diluting their stakes mandatorily. This move will also ensure that investors get more choice. This could also be instrumental in tempering valuations of companies essentially on the back of limited float. Investors should stand to benefit in the process.

Tweaking FPI and NRI norms

There are some clearing benefits here. The FPI KYC process is simpler and even the traditional cap of 24% will go. All FPI investments will only be capped by the overall sectoral limits imposed by the government. Above all, the budget has brought the NRIs under the same regulatory framework as FPIs. NRIs remit $75 billion each year and some part of that needs to come into equities. That can just about happen now!

The big PSU push

After a long time, the government has taken some serious steps to make the PSU investments attractive to small and retail investors. For example, the divestment target has been raised by Rs.25,000 crore to Rs.105,000 crore for the year. That is a lot of paper that is going to be up for subscription in the market. Secondly, the government plans to push divestments largely through the CPSE ETF route. The CPSE ETF is an exchange traded fund that holds PSU stocks. Additionally, the budget is easing capital gains norms for FOFs and also making the ELSS benefits available to investors in the CPSE ETF. This could substantially enhance yields on PSU stocks through the ETF route and make them attractive to investors.

Don’t forget the macros

The real story could play out on the macro front. There is an investment of Rs.100 trillion planned for infrastructure in next 5 years. The GDP is estimated to grow to $5 trillion by 2025 and $10 trillion beyond 2030. That is a lot of wealth and capital flow waiting to be created and the biggest beneficiaries will be the small and medium sized investors. Above all, the government has committed to keep the fiscal deficit at 3.3% in this year and gradually move it lower to 3%. With this kind of robust economic scenario, capital market investors surely stand to gain!

Union Budget 2019

What does the budget mean for personal taxation?

Union Budgets are expected to throw up some tax concessions. Of course, the government has its own resource constraints. The question is if the budget has done a good job on taxation within the limitations. One needs to admit that it has done well!

Tax rates and slabs

The interim budget which was presented in February 2019 had already made a sharp reduction in taxable by giving a rebate of Rs.12,500 under Section 87 for incomes up to Rs.5 lakhs. So, you are now paying tax only if your net taxable income is more than Rs.5 lakhs. Even here, you had all the exemptions plus the standard deduction of Rs.50,000. Effectively, for a regular tax payer, incomes were virtually exempt from tax up to Rs.8-9 lakhs of income. There was a hope that this rebate would be converted into an exemption but that was not done.

The real tax burden came on the high income group. People earning above Rs.50 lakhs were already paying 10% surcharge while those earning above Rs.1 crore were paying 15% surcharge. Now the government has added two more slabs. Persons earning more than Rs.2 crore have to pay surcharge of 25% while those earning more than Rs.5 crore will have to pay surcharge of 37%. This is the highest top bracket tax level since 1985. It is surely going to hit the super high income groups.

Push for digital

The current government has been trying to push for digital shift to curb evasion of tax. Due to lack of digitization, a lot of transactions could not be tracked as they were paid for in cash. The budget has taken two initiatives. Firstly, the digital transaction charges and the MDR have been done away with. Now these costs will be borne by the respective banks out of the cost savings accruing to them from the use of digital. Secondly,  the budget has also proposed a TDS of 2% on cash withdrawals exceeding Rs.1 crore from a bank account during the entire year. This is a tax where you can claim refund but the reporting will curb misuse of the cash route. This is a big story on tax!

Simplifying processes

The budget also took two important initiatives on the simplification of the tax process. Firstly, the IT department will move towards faceless assessment to avoid any instance of officers trying to misuse their positions. This will be applicable up to a certain threshold of income. Secondly, the budget has made PAN and Aadhar literally interoperable. Now Aadhar becomes the default identity for all purposes. Individuals can file tax returns by quoting Aadhar instead of PAN. All high value purchases will not require quoting of PAN but Aadhar will be good enough. That is surely the way forward! 




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