Is this the big bang budget that markets were waiting for?

PSU banks will be recapitalized to the extent of Rs70,000cr to make them more competitive

Jul 05, 2019 02:07 IST India Infoline News Service

Budget 2019
The Union Budget 2019-20 presented by Nirmala Sitharaman may not have been the big bang budget that people were hoping for but it has some interesting macro announcements and some very interesting Robin Hood aspects to it. Let us look at some of the key highlights of the Union Budget for the macros, capital markets and for taxes as a whole

Budget Announcement: What exactly it said?
The tone of the budget was set by the initial remarks that India had touched $2.75 trillion GDP and was now among the top 5 economies in the world. Of course, there are debates over whether India has really overtaken France and UK in the GDP roster but that is more of an academic argument. The truth is that India has emerged as a strong power in the last 5 years and is on the cusp of a major opportunity. This budget was meant to reflect that.

• The budget has laid out a vision to become a $5 trillion economy by 2025 and that is largely in line with our current growth rates, conservative though.

• The corporate tax reduction from 30% to 25% was not extended to all companies but the threshold limit was raised from Rs250cr turnovers to Rs400cr turnovers. According to the FM, this would cover 99.3% of the companies in terms of numbers, although in terms of value it would be much lower.

• To prevent avoidance of Dividend distribution tax (DDT) via buybacks, the budget has proposed considering buybacks of listed companies also for distribution tax at 20%.

• FM has asked SEBI to consider raising public shareholding limit for listed corporates from 25% to 35%. Currently, there are nearly 1,400 companies where promoter holding is more than 65% and all these may have to look at ways to reduce their holdings.

• The pension benefit announced for MSME workers in the interim budget in February has now been officially extended to retail traders and shopkeepers giving them the much needed social security cover.

• With a view to boosting investing in infrastructure, the budget announced a variety of measures. The public private partnership (PPP) model will be deployed for railway infrastructure. In addition, a credit guarantee scheme will be provided for infrastructure projects to enable easy funding. The budget has also promised to widen and deepen the debt markets.

• There are several measures for MSMEs and start-ups which are supposed to provide bulk of the jobs. A 2% interest subvention scheme for MSME loans has been given an allocation of Rs350cr. In addition, the budget has also proposed setting up a social stock exchange where social enterprises can list and raise money. The government has assured that no angel tax hounding would happen for start-ups and investors as long as the returns are filed and details of investors appropriately provided.

• To give a boost to Electric Vehicles (EV), the budget has proposed duty exemption on certain EV parts as well as income tax deduction of interest on loans for EVs up to Rs1.50 lakhs during the life of the loan.

• While the CAD has come down from 5.6% in 2014 to 2.1% in 2019, the government has pegged its fiscal deficit target for this year at 3.3%. That is nearly 10bps lower than the current year level of 3.4%.

• On FDI, the government has promised to review the current limits of FDI in sectors like aviation, media and insurance and increase where required. In addition 100% FDI has been permitted in insurance intermediaries. In addition, the local sourcing norms will be eased for single brand retail to facilitate further FDI in retail.

• The statutory limit for FPI investments will now be allowed to float with the overall sectoral limit. The budget also proposes to merge the equity investment rules for FPIs and NRIs to be able to tap the vast resource of NRI money into Indian equities.

• On the tax front, the benefits of Section 24 on the Income Tax exemption on interest paid on home loans will be increased by Rs1.50 lakhs per annum in case of low cost houses up to Rs45 lakhs in value. This will take the total exemption limit for such players to Rs3.50 lakhs.

• There is no change in the Income Tax slabs or the rates. Currently surcharge on Income Tax is at 10% above Rs50 lakhs and 15% above Rs1cr of income. This surcharge will be enhanced to 18% in case of incomes above Rs2cr.

• To encourage digital transactions, merchants will be asked to provide digital transactions like card payments, UPI, etc. at no cost. Such costs will be absorbed by the banks. On the downside, the budget will also deduct TDS of 2% on cash withdrawals that cross Rs1cr from a bank account in one financial year.

• In the light of the NBFC crisis, the budget has brought all HFCs under the overall surveillance of RBI. This is likely to bring more accountability. Also, the government will give a guarantee on a special fund created by banks to make liquidity available to strong NBFCs.

• As a measure of simplicity, the budget has also announced that the Aadhar and PAN would be made interchangeable. Effectively, persons without the PAN can use Aadhar as an acceptable document for tax filing as well as for high value purchases.

• PSU banks will be recapitalized to the extent of Rs70,000cr to make them more competitive. This would most likely be issued in the form of recapitalization bonds by the government.

• GST, at a policy level, has been further streamlined by allowing all filers with turnover up to Rs5cr to just file quarterly returns and also claim refunds through a totally automated module.

• The budget has also announced an ambitious project to incubate a total of 75,000 small and medium entrepreneurs with the appropriate support for funding, technical skills and the right ecosystem.

• That brings us to the final aspect of funding these outlays. The government has increased the duties on petrol and diesel by Rs1, which will partially reduce the benefits of lower crude prices for customers.

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