Union Budget FY20 - Cocktail of Gandhi, Marx and Adam Smith
The Union Finance Minister of India presented Union Budget for
FY20 today in the parliament. The budget was presented in the light of the
following:
(a) Overwhelming mandate received by the BJP led
NDA in the general elections for 17th Lok Sabha 6weeks ago. The mandate was
underpinned by promises to (i) double farmers' income in 3yrs by making huge
investment in farm sector; and (ii) create employment opportunities by ensuring
high growth through massive investment infrastructure sector and making India
an industrial hub for the global economy.
(b) Marked slowdown in economic activity over
past few quarters, characterized inter alia by (i) poor GDP growth especially
in manufacturing; (ii) poor corporate earnings; (iii) subpar GST and direct tax
collections; (iv) probability of a subpar monsoon; and (v) strong global
headwinds to growth reflected in worsening current account deficit. This limits
the scope for any meaningful fiscal stimulus.
(c) High expectations of radical reform
agenda in view of near absolute majority for the government in both the houses
of the Parliament.
(d) Urgent need to raise long term sustainable
resources to fund the ambitious growth plans.
(e) Substantial monetary stimulus already
in place through easing of rates, bond purchases through OMO and USD purchases
under currency swap program
(f) The interim budget already presented
on 1 February 2019.
Key observations
Big ideas
The following ideas presented in the budget are noteworthy:
- Mega Manufacturing Park
- Study in India
- National grids for highways, power, gas and water
- Development/Deepening of market for corporate bonds and CDS
- PPP in building Railways infrastructure and delivery of passenger freight services
- Promotion of organized rental housing
- Self reliance in aviation with domestic aircraft leasing and MRO infrastructure
- Use of big data for improving compliance (pre filled It returns etc.)
- Incentives for Electric Vehicles
- Divestment of land holdings of CPSEs
- Creation of payment platform for MSMEs to enable filing of bills and payment thereof on the platform itself
- Commercialization of space capabilities.
Key announcements relating to Capital Markets
1. To "consider" raising minimum
public shareholding of listed companies to 35%.
2. Proposal to rationalize and streamline
the existing Know Your Customer (KYC) norms for FPIs to make it more investor
friendly.
3. Proposal to set up a "Social Stock
Exchange" to facilitate fund raising and listing of social enterprises and
voluntary organizations.
4. Interoperability of NSDL/CSDL with RBI
depository to facilitate retail participation in government securities.
5. Consultation for further opening of FDI
in aviation, media and insurance sector. 100% FDI to be permitted for insurance
intermediaries. Proposal to ease local sourcing norms for FDI in Single Brand
Retail sector.
6. FPI limits in companies enhanced to
sector limits with option to companies to set a lower limit for themselves.
Proposal to merge NRI-Portfolio Investment Scheme Route with the Foreign
Portfolio Investment Route to provide seamless market access to NRIs.
7. Rs700bn additional capital for PSU
Banks.
8. Proposal to provide one time six
months' partial credit guarantee to Public Sector Banks for first loss of up to
10% in case of high-rated pooled assets of financially sound NBFCs.
9. HFCs to be regulated by RBI henceforth.
10. ETFs to be considered at par with ELSS.
11. Disinvestment target raised to Rs1.05trn.
12. Taxation of buy back of shares by listed firms to
be at par with unlisted firms and dividend payments.
Tax proposals
Personal income tax
1. No change in rate for personal income
tax, except the following-
Surcharge on personal income tax hiked -
(i) In cases where taxable income is more
than Rs2cr 25% from 15% earlier; and
(ii) In cases where taxable income is more than
Rs5cr to 37% from 15% earlier.
Marginal relief will be provided in both cases.
2. Filing IT return made mandatory in
following cases, even if the total income is below the taxable limits:
(i) Deposit of cash in current account exceeds Rs1cr in a
year; or
(ii) Foreign travel expense on himself or any other person
exceeds Rs2lac in a year; or
(iii)
Charges for electricity paid for himself or any other person exceed Rs1lac in a
year; or
(iv)
fulfils such other prescribed conditions, as may be prescribed.
3. Section 80EEB introduce to all
deduction of upto Rs1,50,000 on loan taken to purchase an Electric Vehicle
(EV). Only one EV per assessee eligible. Loan taken between 1-4-2019 to
31-3-2023 eleigible.
4. Section 80EEA inserted to provide a
deduction of upto Rs1,50,000 in respect of loan taken in FY20 to buy an
affordable house (stamp duty value upto Rs45lacs) by a person who does not own
any house previously.
Corporate tax
5. The rate of corporate tax for domestic
companies whose the total turnover in FY18 was Rs450cr or less (earlier Rs250cr
or less), shall be 25%. A surcharge of 7% shall be applicable for these
companies. No change in rates for other companies.
Miscellaneous
6. As per new
section 194M, from 1 September 2019, all individual and HUF shall deduct TDS
@5% from payments made to contractors (for personal or business purpose) if
such payments exceed Rs50lakh in a year.
7. Taxes on gifts of
money or property paid to a resident outside India shall be payable in India
for any gift made on or after 5 July 2019.
8. To claim benefit
of rollover of exemption from capital gains tax on investment in specified
assets like house, bonds etc., filing IT return would be necessary from AY21.
9. A person who has
not been allotted PAN but possesses an Aadhar Number, can quote Aadhar number
for specified transactions. Such person will be allotted PAN in prescribed
manner. A person having both PAN and Aadhar, can quote any of the two numbers.
10. TDS @2% applicable
wef 1 September 2019 if the cash withdrawal by any person from banks, including
cooperative bank, exceed Rs1cr in a year.
11. From 1 November
2019, all persons carrying on any business whose annual turnover or gross
receipts exceeds Rs50cr in a year, must allow payments through electronics
means, besides other modes of payments. A penalty of Rs5000/day prescribed for
defaults.
12. Deposit taking
NBFCs and systemically important NBFCs brought under ambit of Section 43D to
allow them recognize interest on bad debts on receipt basis.
13. Section 194LC
amended to exempt INR denominated bonds issued overseas from TDS requirement.
14. Withdrawal of upto
60% (earlier 40%) of corpus from NPS account at the time of closer or opting
out to be exempt from tax.
15. Section 80CCD
exemption limit for central government employees increased to 14% (10%
earlier).
16. Contribution to
Tier II account of the pension scheme by central government employees included
u/s 80C.
17. CPSE ETF eligible
for concessional rate of tax on STCG.
18. TDS on taxable
portion of life insurance payments now to be 5% of income (Total
Payment-Premium received) instead of 1% of gross payments.
19. From 1 September
2019, STT on exercise of option to be calculated on difference between the
strike price and settlement price. Earlier STT was payable on settlement price.
20. Import duty for
precious metals increased to 12.5%.
21. Rs 1 additional
cess on petrol and diesel to fund EV initiatives.
Conclusion - 6/10
Being the first budget for the current term of the government,
the finance minister has tried to touch almost all lives in her maiden budget.
Although most of it is statement of intent, and very little specifics, the
direction of the policy seems to be consistent with the stated objectives of
achieving higher growth with social justice.
The finance minister has tried to find equilibrium between
Gandhi (Socialism), Marx (rich pay for the poor) and Adam Smith
(laissez-faire). It's a tight rope walk, and only time will tell the success or
otherwise of the endeavor. All previous attempt of bringing the triumvirate had
mostly failed though.
Many new ideas have been introduced through this budget. If
implemented promptly these ideas could potentially transform the entire growth
and development paradigm of India by making growth faster, sustainable and
equitable. However, given the past track record it would be prudent to wait and
watch how these ideas are given physical shape.
The "super rich" tax may seem an irritant initially,
just like the LTCG tax introduced last year. Though it may not be totally
unjustified, given the lowering of corporate tax rates, there could have been a
better way to raise revenue contribution from the super rich.
The proposal to hike public shareholding limit to 35% is also
questionable. This is reminiscence of the George Fernandez's move to force all
MNCs to dilute their holding and list in India in 1977-78. Indian economy had
lost significantly due to that as companies like IBM and Coke decided to quit
the country rather than diluting their holding.
Anyways, this provision will be contested strongly. Even if
implemented, it may take at least 5-10years to fully implement. Pertinent to
note, near full implementation of 25% minimum shareholding norm took almost a
decade and still many listed PSUs are not compliant.
Higher cess on transportation fuel has also bothered markets.
But it was inevitable given the higher emphasis on EV and paucity of funds to
forcefully push the usage of EVs.
Insofar as market reaction following the budget presentation is
concerned, it may be a knee jerk. There is nothing in the budget to suggest a
disruption in current conditions. If at all there are some positives like bank
recapitalization, NBFC support and more money in consumers hands.
Also refer to
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