Union Budget 2017-18: A carrot after a stick?

Demonetisation impact on India’ GDP growth will be known with a lag of few quarters. Since FY16, government has started to pump prime the economy by pushing infrastructure spends higher in its quest to revitalize the economy. We believe the government will continue to throttle the investment cycle though its planned spends. Railways, Roads, Renewable energy, Defence will possibly continue to draw attention of government spending. Railways may be the cynosure of the upcoming Budget’ infrastructure thrust. 

Government’ thought process of changing taxation norms for investors in capital markets is an important issue being eagerly awaited to be assessed. While the Finance Minister has assured the capital market participants on status quo on taxation and no intent to tax them further, it will be critical to understand what is proposed to be tweaked to get higher tax collection from the capital markets. 

Long term capital gains tax on equities remains zero while short term capital gains tax continues to be at 15%. Any tax rate changes will not be market friendly and needless to mention, that any surprise element here could impact market sentiments. The definition of holding period for computation of long term capital gains tax has changed to 3 years in case of debt mutual funds, real estate, while for equities it has remained one year. It seems logical to expect that the government may look to change the holding period to 3 years. This would result in indirectly shoring up capital gains tax collections to the government since the incidence of short term gains tax will increase. 

Bonus stripping activity undertaken by investors by buying stocks ahead of the bonus date and booking capital losses after the issue of bonus shares will lose favour amongst investors. This would lead to considerable increase in amount of taxable income. 

Last year’s budget included some key announcements that promoted low cost housing and offered cheaper home loans to individuals who opted for amounts of up to Rs 35 lakhs during the 2016-2017 fiscal. These benefits might be extended for the 2017-18 period. Moreover, there might be additional tax breaks for those involved in the construction of such affordable housing.

Actual benefit of demonetisation may be known once the extent of undisclosed cash deposited in the banking system is assessed. The general expectation is that the benefits from the demonetisation exercise will flow to tax payers by reducing direct tax rates on personal incomes and corporates. Since it looks early to quantify benefit from demonetisation, it may be too early to expect a drastic change in direct tax rates. 

However, the Finance minister may hint at giving a road map for reducing burden on tax payers in the future years. Minimum taxable income limit may go up to provide immediate relief to tax payers at large. It is widely expected that the minimum taxable income level can go up from Rs 2.5 lakhs to Rs 4 lakhs. Lower than such an expected rise in the minimum taxable income level will prove to be a dampener. 

Government’ allocation for provision for capitalisation of government owned banks will be critical for strengthening the banking system. Government disinvestment plan & level of government borrowings for the next year will be also eagerly watched for. With crude price on the rise, it needs to be seen whether the government will reduce the excise duty on petrol/diesel to give some relief to consumers. 

The government would try to maintain fiscal prudence while providing for giveaways for stimulating the Indian consumer at large. Beyond its own push to build infrastructure assets, the focus will be on wooing foreign direct investments, enticing the private sector into infrastructure investments in its quest to kick-start economic acceleration and create much needed jobs.

Post demonetisation, the Union Budget has gained significant importance. With expectations running high from the government based on the perceived gains of demonetisation, the Union Budget 2017-18 has a tough task to please different sections of the society. 
________________________________________________________________________________________________Shashank Khade is co-founder & director of Entrust Family Office Investment Advisors