Union Budget 2017-2018 Review: CD Equisearch

Finance Minister Arun Jaitley’s fourth annual budget comes in the wake of state elections, the effect of demonetization on economic growth, flagging investments, and Trump’s H1B visa decision. In tone and tenor, Budget 2017 is obviously aimed at the most vulnerable sections of the population, in rural as well as in urban areas. It provides tax breaks to the low and middle income segment of the working population. As shown by the abolition of the Foreign Investment Promotion Board, along with the promise of further liberalization of the foreign direct investment policy, this may be the first few steps towards further liberalizing the economy.

A big infrastructure spending push, the boost to affordable housing and a fiscal deficit target of 3.2% of gross domestic product (GDP) announced in Union Budget 2017 came as a big boost to banks. A tax concession on provisions for bad loans also came as a relief for Indian banks which are struggling with non-performing assets. As banks have been struggling with a large number of stressed cases in the infrastructure sector, fresh investments in infrastructure segment will get the ball rolling and hopefully turn around some of the debt-laden flagging companies. The sour note for banks - the state-owned lenders - was the lower capital infusion plan for the next fiscal- set aside only Rs 100 bn for bank recapitalization, lower than the Rs 250 bn earmarked for the current fiscal. 

The finance minister also announced a reduction in tax rates for small and medium sized companies as part of an earlier promise to gradually reduce these corporate tax rates and phasing out of exemptions given to companies. The tax rate for companies with an annual turnover of up to Rs 50 crore has been brought down to 25% from 30%. This will benefit 96% of the total universe of companies. The finance minister also announced a surcharge of 10% on those individuals earning an income between Rs 50 lakh to Rs 1 crore while retaining the surcharge on those earning an income above Rs 1 crore. The reduction in corporate tax is aimed at rebooting the MSME sector which has been hit hard by the demonetization drive of the Government of India. There is also a promise that the first-time taxpayer would not be subjected to tax scrutiny. Discernible changes in excise and customs duties were absent as the same would be soon replaced by GST. Tax estimates for current fiscal suggests that remarkable slowdown is expected in the service tax (4.1% vs 28.1% in Q4 of last year) and excise duties collections in Q4, while income tax estimates are left almost unchanged- a paradox considering windfall gains expected from PMGKY scheme 2016 for declaration of undisclosed income/ unaccounted cash post demonetization.

Apart from greater scrutiny of the money found in banks post-demonetization, there will now be a limit on how much can be spent in cash. No payments of over Rs3 lakh per transaction, per day, will be allowed in cash. Also heartening is the push to make political funding legitimate: no cash contribution of over Rs2,000 will be allowed to a political party, and the launch of electoral bonds by the Reserve Bank of India to facilitate legitimate donations.

The fear of equity losing its long-term capital gain tax benefits turned out to be unfounded. In fact, real estate has benefitted with the ‘long term’ now being defined as 2 years instead of 3 years. Despite highlighting the government’s goal of doubling farm incomes in five years, the finance minister did not spell out a clear strategy to achieve the target at a time when farm incomes have plunged due to lower crop prices.

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The budget announcements come in the backdrop of falling farm incomes despite record production of rain-fed kharif crops in 2016-17 and a rebound in agriculture growth. Farm incomes were severely dented in the face of the cash crunch that followed the 8 November demonetization of high-value currency. The FM has specially given emphasis on several key issues, including doubling income of farmers in five years, giving priority to roads, electricity supply, safe drinking water and other basic amenities for rural population, focus on employment and skill development for youth, which are all worth welcoming.Disclaimer: The views and investment recommendations expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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