The Union Budget 2020-21 appears to have realized the fiscal limits and has not done enough to excite the market, where expectations were running very high. It was greeted with the biggest single day crash in Nifty in last 1 year. Only the consumer and technology sector managed to survive the sell-off. Otherwise most sectors have fallen back to pre Nov’19 levels.
Budget has been woven around three prominent things 1) aspirational India to boost the standard of living 2) economic development for all and 3) building a humane and compassionate society.
BUDGET MATH:
- Fiscal deficit target has been revised upwards to 3.8% from 3.3%. FY21 fiscal deficit target at 3.5% of GDP. This would increase fears on sovereign rating downgrade. Borrowings program has also been at a record high of Rs7.8trn.
- Expenditure Growth for FY21 at 12.7% suggest government still mind-full of going all out to spend given the GDP slump and lower Tax Receipts growth of 8.7%.
- Tax collections have been buoyant, with Corporate, Income and Indirect taxes increasing 57%, 122% and 124% respectively over FY 14. Taxes as a % of GDP have seen a continuous increase from FY 14.
- Like in the past three years, the government has shifted a large part of its food subsidy to Food Corporation of India (FCI), which implies persistent reliance on off-budget borrowings. Food subsidy is increasing by a meagre
- 7.3% and 6.3% for FY20 RE and FY21BE respectively. It has grown at a CAGR of only 3.3% over FY14-21.
- Although the central government has targeted growth of 13.4% YoY in capital spending in FY20 and 18.1% in FY21, capex growth is almost negligible next year after including the planned investment spending by public sector enterprises (CPSEs).
- Against the backdrop of stagnating farm incomes and rural demand slowdown, the government has budgeted Rs1.34tn for agriculture and farmers’ welfare (31.9% growth in FY21BE) and Rs1.2tn (decline by -2% in FY21BE) for rural development expenditure.
- Allocations to PMKSY almost doubled albeit on a lower base while MGNREGA witnessed 13.4% reduction in allocation. This highlights the shift in ideology under the NDA regime as benefits are now transferred as stipend v/s the earlier transfer based on amount of labor done. Overall allocation to these schemes has increased by 15.1% in FY21BE as compared to a decline of 9.8% in FY20RE.
- After growing at a robust growth rate for the first 4 years, capital expenditure (through budget and public enterprise) is estimated to grow at the lowest rate of 2.4% in FY21 BE. Budgeted capex is expected to grow by 18.1% and non-budgeted capex is expected to decline by 5.3%. Despite this slowdown, the overall CAGR for NDA regime remains impressive at 16.9%
- Overall growth for the 3 key Subsidies has been almost flat in FY21 BE given the fiscal constraints and higher base of 15.5% growth in FY20RE. Food and oil subsidy has increased by 6.3% and 6.1% respectively with a sharp 10.9% decline in fertilizer subsidy.
PERSONAL INCOME TAX CHANGES: May not be exercised by many
New tax slabs were announced which would ultimately increase the disposable income in the hand of Tax payer. However, they would have to let go of the exemptions they are currently availing. Deductions such as 80C, LTA, 80D, 80G, Standard deduction, HRA, Interest on home loans etc. would not be allowed in the new tax structure.
Implications:
- It seems to be a welcome move as various smaller measures to boost the economy throughout 2019 had not been a success.
- NEGATIVE for Life Insurance Companies: Buying Insurance or mediclaim has now become optional
- However, there is some respite as very few tax payers are likely to migrate to the new regime as the exemptions to be foregone are far too many.
CHANGES IN DDT: DDT (effective DDT was ~20.56%) shall not be taxed in the hands of the Company but will be taxed at the marginal tax rate in the hands of the shareholder. Holding companies have been granted a deduction u/s 80M for the dividend income received from their subsidiaries to remove the tax-cascading effect.
In FY18, DDT of Rs412b was collected from domestic companies with ~88% paid by listed entities and the balance by unlisted companies.
Implications:
- POSITIVE for tax payer in the lower tax slabs
- POSITIVE for companies as more amount would be available for distribution
- NEGATIVE for promoters and holding companies as the ultimate tax incidence would be at the highest rates.
- Many privately held companies may prefer the buyback mechanism over dividends due to increase in the tax arbitrage between dividend income and share buybacks in the hands of the recipient.
Focus on RURAL: 22% jump in Farm credit and a 16- point actionable plan to double farmers’ income by 2022 re-enforces government focus. The major focus of the budget is on the doubling farmers’ income by 2022, strengthening irrigation facilities and higher allocation agriculture and allied (Rs1,547bn vs Rs1,208bn).
Widening the scope of Tax Deducted at Source (TDS)/ Tax Collected at Source (TCS)
- TDS of 1% on amount remitted by e-commerce providers to sellers.
- TCS of 5% on foreign remittance through Liberalized Remittance Scheme (LRS) if the amount remitted is 7 lakhs or more
- TCS of 5% on selling of overseas tour package.
INFRA remains subdued: Muted capex spending is negative for the infrastructure sector
No new announcement on Infra projects as well as funding aspect has been a letdown for INFRA Companies.
- Roads: negative – Total capital outlay for road sector is muted at Rs1.56tn. NHAI capital outlay is down by 4% at Rs1.08tn in FY21BE v/s 1.12tn in FY20RE.
- Railway: Negative – Total capital outlay for railways grew by only 3%.
- Defense: Negative – Defense capex spending also remains muted at INR1.13tn, up 3%
- Capex funding: Positive – Incentivized Sovereign Wealth Fund’s investments in infrastructure by giving 100% tax exemption on their interest, dividend and capital gains income. (minimum 3 years lock-in period)
- Infrastructure financing: Positive – To fulfill the need for long-term debt financing for infrastructure, a pipeline of Rs1000bn has been proposed by infusing Rs220bn as equity in Infrastructure Finance
Healthcare & Pharma
- India proposes viability gap fund windows for Public-Private Partnership (PPP) hospitals
- India proposes to use taxes on medical devices for health infra
- Provided Rs690bn for health sector
- There are 20,000 empaneled hospitals in Ayushman Bharat and need more in tier 2 and 3 cities to benefit poor in these areas
- Proposes cess on import of medical equipment
Cigarettes
- NCCD (National Calamity Contingent duty) on Cigarettes have been hiked leading to a tax incidence of ~9-10%. Cigarette companies would require a price hike to pass this to the consumer. However, any price hike would raise the ad valorem tax as well, requiring a further price hike to pass that through.There is likely to be a ~11% tax hike as 64 mm has seen a sharper tax hike of 15% while others have seen tax hike of 9-10%. ~11% hike would mean around ~7% price hike which would impact Cigarette Volumes by 3-4% YoY.
- For cigarettes, NOW both Budget and GST which would be monitored.
Other announcements
- Plan to sell Government’s IDBI bank stake
- Plan to sell part of holding in LIC in IPO
- Compressors for AC, refrigerators and washing machine: Rise in duty on imported compressors from 10 to 12.5%.
- Household appliances and fans: Import Duty increased from 10 to 20%. Positive for those who manufacture in India.
- Import duty on PCBA used in mobile phones: Import duty has been hiked to 20% from 10% and is positive for contract manufacturers.
- Fertilizers subsidy: Reduced by 10.9% in FY21 BE in tandem with the plan to reduce subsidy burden. Urea seems to impacted more than NPKS as the raw material (mainly Phos acid) for NPK is on a downward trend and therefore the fall in subsidy for NPKs might not impact companies.
- invoking SARFAESI by NBFCs: Reduction in ticket size for invoking SARFAESI by NBFCs from Rs1cr to Rs50L.
- ESOPs – tax impact at the time of leaving the company or sale of shares as against the current law of tax impact at the time of exercise of ESOPs.
Source: India Budget Documents
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