There had been widespread speculation about the provisions of the Union Budget 2017. Many expected that the government would announce populist measures to possibly counteract the hard hits taken by the country’s taxpayers because of demonetization. Finance Minister Arun Jaitley, however, chose prudence over populism to announce a budget that is largely in line with the general direction of the government’s policies. The middle-path budget, as I like to call it, has focused on long-term infrastructure and systemic reforms.
A vital aspect of the Budget is the incentivizing of digital payments, which is one of the ways in which the government is seeking to welcome a digital economy. Expectedly, the use of cash is simultaneously being discouraged, with cash transactions over INR 3 lakh now being forbidden. Steps are being taken to promote digital payments through the BHIM app and the government has launched two schemes in support of this. Another step in line with digitization is that rail tickets booked on the IRCTC website will not be charged service tax. Apart from IRCTC, Railway PSEs such as IRFC and IRCON have been listed on the stock exchanges to enhance their accountability and unlock greater value.
There have been some amendments to tax rates for MSMEs – to 25 percent from the earlier 30 percent for companies with an annual turnover of up to INR 50 crore. This move will undoubtedly be a shot in the arm for the productivity and profitability of small businesses. Another amendment that will have a positive impact for the lower-income group (LIG) is the reduction in the first slab of personal income taxation from 10 percent to 5 percent for individuals with incomes between INR 2.5 and 5 lakhs income from 10% to 5%, surcharge of 10% on income between INR 50 to 100 lakh.
Startups get a good boost as well – they can claim income tax benefits in three of the first seven years of their existence, up from five earlier. They can also not benefit from carry-forward of losses even if the shareholding has changed considerably. In fact, these measures for small taxpayers constitute the defining aspect of this budget. The middle-class taxpayers, however, have not received such benefits – for instance, there is no relief in service tax and VAT.
Another highlight of the budget is the reduction in the holding period from three to two years for computing long-term capital gains for transfer of immovable property. This is one of the key provisions to boost housing, another being the increase of project timelines for affordable housing from 3 to 5 years – this will assure developers about project viability. Another notable move in this area is the awarding of ‘Infrastructure’ status to affordable housing projects, which implies cheaper loans to developers. In addition, the base year for indexation has been shifted from 1.4.1981 to 1.4.2001 for all classes of assets, including immovable property.
As with the bent of the rest of the budget provisions, provisions with respect to the equity market are geared towards stabilization and consolidation. Accordingly, the focus is on long-term growth and lowering of fiscal deficit. Against the market concern of an increase in the long-term capital gains for equity from 1 to 3 years, Mr Jaitley has kept it unchanged, to the relief of many in the market. The implementation of cheaper borrowing rates is expected to boost discretionary consumption in the economy, which is trying to emerge from the slowdown effects of the currency transfusion program. Enhanced agricultural credit limit, increased crop insurance coverage, and platform to improve realizations for farmers’ produce are also likely to contribute to better farm income and support aggregate demand.
It is obvious that the government wants to increase the ease of doing business in the country. This also falls in line with the Make in India campaign. Consequently, we now have relaxed provisions pertaining to domestic transfer pricing, which will encompass only companies that are claiming profit-linked deductions or exemptions. The Foreign Investment Promotion Board (FIPB) has also been removed, a clear encouragement to foreign direct investment (FDI) through the automatic route. Another move to facilitate ease of business is the increase in threshold limit from INR 1 crore to 2 crores for audit of business entities who choose presumptive income scheme.
Predictably, the net borrowing number – INR 3.5 lakh crore (lower than FY2016-17) – is also in accordance with market expectations. This is expected to provide an interim comfort to bond markets by resulting in a lower supply of fresh government bonds. Further, Lower government borrowing could provide more space for corporate borrowings in the capital market. The coming months are also expected to witness comfortable liquidity, which should remove the requirement of OMO purchases by RBI.
A key aspect of the budget this year is the significant mobilization under the small savings schemes, a result of demonetization. These factors, along with benign inflation and overall fiscal prudence, could provide some leeway to the RBI for an interest rate cut. Investors (who can withstand volatility) can consider duration bond/gilt funds. Low capacity utilization leading to low credit offtake/supply augurs well for spread compression in the sub-AAA segment. I believe that corporate bond and accrual strategies are likely to fare well in the foreseeable future.