The stock market was left deeply disappointed by two measures in the Budget
Narendra Modi has two overarching ambitions – to make India a $5 trillion economy, whatever professional pessimists might say, and to transform India. The annual Budget, even though it is supposed to be only a statement of income and expenditure of the government, is one of the many instruments to propel India towards those goals as over the years it has become a document to articulate the government’s long term policies.
The first Budget of the second term, presented by Nirmala Sitharaman, is sincere and diligent but by no means path-breaking. It only continues down the path laid down by the government in its first five-year term and most of the reforms proposed can, at best, be termed incremental.
Arun Jaitley as Finance Minister had promised to bring down corporate tax rates progressively to 25 percent. The current Budget keeps to his promise by reducing the tax rate to 25 percent for companies with an annual turnover of Rs 4 billion (the earlier limit was Rs 250 crore).
This is expected to benefit 4,000 companies. This will mean that only some 6,000 companies, which have a turnover exceeding Rs 4 billion, will remain in the top tax bracket. Having reduced the government’s stake in many public sector companies to 51 percent, the government is now proposing to take the next logical step by going below that limit in non-financial firms.
However, the government intends to retain control by using the stake held by public financial institutions such as the LIC and others. If private promoters can exercise control over companies with minority stakes, so can the government!
Like all Finance Ministers, Nirmala Sitharaman has also seen her primary role as one of raising the maximum revenues through taxes and other means. Although she was careful to quote a Tamil classic 'Purananooru', to assert that the NDA government was for judicious taxation and did not wish to trample on taxpayers, she has set very ambitious goals of tax and non-tax revenues.
The net tax receipts for 2019-20 have been budgeted at Rs 16,496 billion marking an increase of 25.3 percent year-on-year on an actual basis.
Non-tax revenue is estimated to increase by 27.7 percent year-on-year to Rs 3,132 billion, owing to increase in the RBI dividend and other interest receipts.
The government has set an ambitious target for divestment of Rs 1,050 billion. The one major departure is the decision to raise funds abroad using the sovereign borrowing route to fund the fiscal deficit.
The government wants to leverage India’s low sovereign external debt to GDP and proposes to finalise plans for the issue of the first overseas sovereign bond by September to ease the pressure on the domestic market and help RBI keep interest rates low.
A second welcome initiative was the clear-cut policy boost for the shift to electric vehicles. The Budget announced income tax rebates up to Rs 1.5 lakh to customers on interest paid on loans to buy electric vehicles, with a total exemption benefit of Rs 2.5 lakh over the entire loan period.
The Finance Minister also announced the customs duty exemption on lithium-ion cells, which will help lower the cost of lithium-ion batteries in India as they are not produced locally.
However, in some areas -- individual tax rates and customs duties -- the Budget has moved in the reverse direction. While the general trend has been to reduce personal income tax, the government, in order to bolster its pro-poor image, has decided to increase the taxes on the very rich.
It has introduced a higher surcharge for those earning over Rs 20 million and effectively created two new tax slabs. Those earning Rs 20 to 50 million will pay tax at 39 percent, while individuals earning a taxable income of over Rs 50 million will pay tax at the rate of 42.7 percent.
A cynic might conclude that the NDA government has targeted the cabal of high earning Supreme Court lawyers! With an aim to reduce imports along and provide a fillip the Make in India mission, the Budget has proposed to raise custom duty on over 70 items, such as cashew kernels, PVC, vinyl flooring, tiles, metal fittings, mountings for furniture, auto parts, certain kinds of synthetic rubbers, marble slabs, optical fibre cables, CCTV cameras, IP cameras, digital and network video recorders etc.
Much to the disappointment of the gems and jewellery industry, the Budget has also hiked import duty on gold and other precious metals to 12.5 percent from 10 percent.
The stock market was left deeply disappointed by two measures in the Budget. One, the proposal that a listed company will now have to pay tax on buyback under section 115QA at the rate of 20 percent plus applicable surcharge and cess.
The move is likely to impact buyback by all listed companies in the future. Two, the proposal will reduce the maximum promoter shareholding from the current level of 75 percent to 65 percent.(Author is from Escorts Securities)