If history is to be believed, Union Budget has been non-eventful for the market in recent years and the influence of the Budget on the short term market performance has been steadily declining. However, FY 2015-16 Budget is an exception. This year’s budget will be the new government’s first full year budget and, consequently, a lot of attention is being given to the budget. Investors are keenly focused on the budget, looking at it as a gauge to measure the government’s reform momentum. Expectation is sky high. However, a Budget cannot make everybody happy; a populist budget makes the common man happy but it frustrates the corporate houses whereas a reformist budget is criticized by common people. It is an exceptional case this year that everybody, from FIIs to salaried people, large corporate to tea vendor, is expecting from the budget – a meaningful ‘Achhe Din’ for their own purposes. Quite naturally, this year’s Budget is getting maximum importance since the 1991 Budget, which is believed to be a game changer for modern India.

We are aware of the fact that Nifty has rallied 4000 points (since the low of August 2013) ignoring inflation, no rate cut, high deficits, low GDP, not so good earnings, sluggish demand, no capital expenditure, corruption and all the other negative factors. It rallied purely on hope (supported by liquidity) that Narendra Modi will bring ‘Achhe Din’. After a massive ‘hope’ rally, the market is now expecting some actual deliverables from the Government, steps which could ratify the rally. Market will now react on what the Government does and not on what they can do. Challenges are galore before the Narendra Modi led NDA Government. However, one miracle that the Government received at the right time is the fall in Crude Oil Price.

The Government has to quickly find innovative measures to kick-start the investment cycle through capital expenditure from its own pocket (lower subsidies, higher capex), by attracting new FDI investments in several industries, allowing banks a larger leeway in project equity by conversion of debt to equity or buying fresh equity (a lower fiscal would help release the  SLR), de-clogging investments in property (the double taxation imbroglio in Real Estate Investment Trusts) and via structural reforms with strict timelines for GST (goods and services tax).

After two years of sub-10% tax revenue growth, collections are looking up due to increase in excise duty on petroleum products (incremental revenues of Rs500bn). Lower subsidies (down Rs460bn in FY16E) and fiscal deficit at 3.6% of GDP would enable the government to hike Plan allocation by 16% (5% CAGR over FY12-15E). This would spur higher spending on initiatives like Clean India, Skill India, and Digital India, urbanization (100 smart cities), housing and road / rail infrastructure. The GST roadmap and fiscal incentives for “Make in India” are also likely to be laid out in the Budget. With a higher revenue-neutral rate under GST, an increase in central indirect tax rate to 13% or 14% from 12% is likely. Fuelled by improved revenue buoyancy, the focus of the Budget will be on investment spending.

List of Issues as indicated below that could be addressed in the Budget

  • Amendment in the Finance Act (No.2) 2014 to bring clarity in taxation of income arising from fund managers of FPI who are present in India. Under the suggested amendment, FPI management of offshore funds that do not create a permanent establishment of offshore fund / manager in India should not result in the fund being treated as a tax resident in India.
  • Removal of 15% dividend distribution tax to boost investor sentiment.
  • Reducing import duty on gold by 2-4% to boost exports and manufacturing of gems and jewellery.
  • Restoring custom duty on crude oil for supplementing tax revenue collections. Custom duty on oil was removed in 2011.
  • Raising the minimum lock-in period for withdrawal from PPF from six to eight years, to attract longer-term funds for infrastructure.
  • Postponement of the scheduled April rollout of General Anti Avoidance Rules (GAAR).
  • Clarity on royalty payments for information technology tax on advertisement and promotional expenses as part of branding, demand for 10% upfront payment of tax before a case went into litigation and show-cause notices on Minimum Alternate Tax.
  • A lower Minimum Alternate Tax (MAT) for sectors such as Micro, Small and Medium Enterprises (MSMEs), Special Economic Zones (SEZs) and infrastructure to push the Make in India initiative.
  • Special package for low-cost housing, such as exemption from tax under 80IB for flats under 1,000sq ft, which was removed in 2008.
  • Attractive tax norms for real estate investment trusts (REITs) and Infrastructure Investment Trusts (InvITs) such as reducing the lock-in period of three years for exemption from capital gains tax, exemption from MAT, etc. Tax exceptions for Depository Receipts issued on the back of securities other than ordinary shares.
  • Reform of inverted duty structure where taxes on finished product is lower than that on input in products such as power generation machines, telecom equipment and petroleum products.
  • Tax benefits to attract electronics and telecom equipment manufacturers
  • More targeted LPG subsidies, with taxpayers in the 30% tax slab excluded.
  • Rationalization of Special Additional Duty (SAD) as part of measures to lay the groundwork for implementation of Goods and Services Tax. SAD is applied on imports over the basic custom duty.
  • Rationalization of Special Additional Duty (SAD) as part of measures to lay the groundwork for implementation of Goods and Services Tax. SAD is applied on imports over the basic custom duty.
  • Reduction in corporation tax as a part of the Make in India initiative. The corporation tax has remained unchanged at 30% for the last seven years.
  • Expansion of CENVAT tax credit to all travel-related services. The tourism and hospitality sector”s also want at par treatment with exporters and to be exempt from the service tax entirely.
  • Income tax exemption limit could be raised to promote demand and changes in tax slab to benefit lower income brackets. A tax on the super-rich could also be announced for individuals with income exceeding Rs 1 crores.

Key Bills that are expected to be taken up in the Budget Session of Parliament Progress

GST constitutional amendment billWill help create a single nationwide system of taxation and eliminate the cascading nature of taxation. Expected to boost competitiveness and increase tax compliance.It has been introduced in the lower house of parliament and the government aims to implement it by Apr-16.
Amendment of Land Acquisition ActWill make it easier to acquire land and reduce the time taken to complete infrastructure projects.The government has issued an ordinance to amend the Land Acquisition Act, 2013.
FDI in InsuranceThe upper cap of FDI in insurance will be increased to 49% from 26%.The government has issued an ordinance as the bill could not be passed by the upper house in the winter session. (The lower house has approved it)
The Coal Mines (Special Provisions) BillWill facilitate e-auction of coal blocks to private companies for captive use and allot mines directly to public sector undertakings.The government re-promulgated the ordinance after the earlier ordinance issued in October expired.
Electricity (Amendment) BillTo promote competition and improve electricity supplyThe bill has been introduced in the lower house of parliament.

To be continued…….

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