This being the first union budget under the new government & given the fiscal situation in India we are unlikely to see any major tax cuts or sops being given. The budget must clearly focus on giving the flagging economy a stimulus and increasing government spending. The new government must focus on reducing tax disputes, increasing tax compliance besides ironing out the remaining glitches in the GST regime. We could also see some directions towards Direct Tax Code (DTC). There’s little chance of the budget on 5th July 2019 being a populist one. Thus although various stakeholders may have a big wish list, some of them are unlikely to be provided in the upcoming budget.
Re-introduction of LTCG tax last year has adversely impacted the capital market as investments have become less lucrative and more volatile. It has also complicated taxation structure on listed securities and equity mutual funds, which has affected sentiments of investors. In addition, there is a double levy of STT, once at the time of sale of securities by mutual funds and again at the time of redemption by investors. This double levy of STT adversely impacts the returns in the hands of investors and acts as a deterrent from investing in mutual funds. I expect at least one of the two above to be altered in this budget.
The government should consider increasing investment limit u/s 80C from Rs.1.5 lakh to Rs.2 lakh in order to encourage individual taxpayers to invest more. The current deduction limit of Rs.1.5 lakh u/s 80C for certain investments/payment has not changed in the last 5 years. This will not only boost savings through ELSS (and capital markets) but also other small savings like PPF & SSY.
DLSS (Debt Linked Savings Scheme) on the lines of ELSS could be introduced to channel investments into the corporate bond market. Introduction of DLSS will motivate small investors to participate in the bond market which will ultimately deepen the capital market of the country. This should also help to ease the liquidity issue the businesses are currently facing.
The government’s focus is to develop and provide world-class infrastructure. Hence, the government may consider re-introduction of the deduction for investment in infrastructure bonds up to Rs.50,000. The deduction for investment on such bonds was earlier available under section 80CCF, to the extent of Rs. 20,000 in FY 2010-11 and FY 2011-12. However, the same was subsequently withdrawn. The reintroduction of the deduction would provide long-term finance to the government and provide an impetus to the infrastructure sector.
There are specific request relating to the automotive sector which is passing through one of the longest sales slowdowns. The auto industry has sought reduction of GST on all vehicles to 18% from the current rate of 28%. The Society of Automobile Industry (SIAM) has also asked the government an incentive-based vehicle scrappage scheme in order to get polluting, unsafe and old vehicles off the road and help them replace with new ones. The steel industry expects budget sops for infrastructure and auto, will push demand for steel.
India’s agricultural sector is today in dire need of support, given deflating food prices, ineffectual MSPs and a procurement machinery that is in shambles. Replacing the plethora of food and agri-input subsidies with flat income support for farmers, should be considered. Some developments towards a Universal Basic Income (UBI), which has been in the works for quite some time, could be expected on those lines.
Other areas that should get mention and attention are the financial sector and private investment. A well-functioning financial sector is the life line of an economy. However, elevated banking sector NPAs and now the defaults on debt repayment in the non-banking finance sector (NBFC) has created a crisis in the financial sector. Infusing more capital into the public sector banks, removing the roadblocks for the speedy resolution of IBC cases and incentivizing banks to buy good quality NBFC assets may ease the financial sector woes. Any announcement to this effect would be a welcome step.
Reviving private investment had been a challenge for the last five years and continues to be a challenge currently. It is due to the slowdown in incremental private capex that the GDP growth has failed to accelerate and sustain itself close to or in excess of 8%. Though there is no easy way out, a clear five-year road map on tax reforms, especially corporate tax rates, and measures to bring the stuck capital back into the production process by fast tacking the resolution of non-performing assets of the banking sector will go a long way in reviving the incremental private capex.
All said and done this is unlikely to be a populist budget & the need of the hour is to revive growth. What kind of policy decisions are taken to that effect is what will be closely monitored.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’