BUDGET FY17 - BEST UNDER THE CURRENT CIRCUMSTANCES

By SP Tulsian and Ruma Dubey

It was a roller coaster ride of a Budget. The markets fell some 600 points intra day to not only recover but jump back into the green once it read through the fine print.

So, what’s the verdict; how is the Budget?

On a rating of 10, it scores 5. Overall, under the given circumstances, this is the best that the FM could have done. The focus, which two years earlier, when the BJP came to power, was entirely on corporate India. Now as it learns the ropes, there has been a demographic shift to rural India. This year, 70% of the Budget was focused on agriculture and rural development. And under the present environment, this was the best thing to do.

For the common man, the relief is that thank god there was no hike in service tax! That in fact was the biggest fear all along. At least that did not happen. So we are happy for what did not happen and not about what did happen, which is no change in tax slabs and no further hikes as expected.  Those in the lower income bracket have most certainly benefitted and it is good thing that more attention has been paid to those on the lowest rung of the pyramid.

So why did the market fall first and then jump back into green? The initial reaction was because nothing that was expected, the positives, really came through. Instead the market was unhappy that bank recapitalization was only Rs.25,000 crore, that STT on options has come in at 0.05% and a dividend distribution tax (DDT) of 10% has been levied on individuals earning more than Rs.10 lakh per annum. On a lighter note, on this issue, Uday Kotak, who was on TV giving his reaction to the Budget looked a bit upset as he was looking at a tax hit of Rs.6 crore – he holds some 60 crore shares in Kotak and that means at Re.1 per share, his dividend income was around Rs.60 crore and now he will have to part with Rs.6 crore as DDT!  Azim Premji earns a dividend income of Rs.100 crore, he takes a hit of Rs.10 crore.

Coming back to the Budget and why it fell, there is a literal global sell off on the markets and this too played on the sentiments. What is surprising is that ITC lost over 7% when FM announced a 10-15% hike in excise duty. This was not something out-of-the-blue; it was so much on the cards. ITC’s fall also aggravated the fall of the markets.  Thus ITC, DDT, STT, lower than expected bank recap pushed down the markets.

But it soon recovered because better sense prevailed. This was thanks to the fact that the FM stuck to the fiscal deficit target of 3.5% for FY17. And this means that RBI might, within the next day or two, announce a rate cut, not waiting for the scheduled meet on 5^th April. It could be just 0.25% but will be a huge sentiment booster. This sticking to the fiscal deficit target shows fiscal prudence and will thus force RBI to act. The anticipation of a rate cut, more than the Budget is what has pushed back the indices into the green – this is like getting a stock split and then a surprise bonus issue too!

In a nutshell:

The 10% DDT is on individuals earning over Rs.10 lakh; so how does it affect most of us and the retail investor? And if the likes of Uday Kotak and Azim Premji have to pay more, why not?

The STT  is at 0.05% on options. We are sptulsian.com have constantly been advising our readers to refrain from trading as the risks are too high. Thus this tax, in many ways, reiterates what we believe – keep off trading and turn into investors.

The Budget has given sops to farmers and rural development, with emphasis on skill/employment generation. The FM said that it is time to change the focus from food security to income security and when that happens, it automatically will mean more money will be spent on buying tractors, automobiles, white goods, FMCG goods. Thus doubling rural income will indirectly benefit corporate India.

Doubling rural Income will also give impetus to railway freight as it will automatically lead to more passage of goods. Road and highway allocations have been hiked  and so have allocations to MNREGA, in fact the highest ever at Rs.38,500 crore. Increased allocation to irrigation and rural electrification. All this will benefit India Inc.

There are many complaining that the bank recapitalization of Rs.25,000 crore it too less. We in fact are of the view that it is too much! Why this money to be given at all? By giving this money, we are promoting inefficiency. It is like putting money in Air India. Stop it or reduce it drastically, automatically, banks will be forced to buckle up. Recap does not help banks; it helps raise more Vijay Mallyas. Thus it is good that the FM restricted this to R.25,000 crore- not allowing more good money to chase bad money.

Overall, the Budget is balanced; this is really the best Jaitley could have done under the given circumstances. What we did not like is the many cess which the Govt has brought in – this is an additional burden and why through cess when there is already a tax? We also did not like the fact that as promised there was no reduction in corporate tax which now remains at 30%. A big thumbs down to the Amnesty window – it discourages honest tax payers as those stashing black money have been legitimately given an opportunity to get away by paying collectively some 45% - no questions, no punitive actions.

Highlights of the Budget

For the common man:

• No changes in income tax slabs
• Those with less than Rs.5 lakh income – deduction increased from Rs.2000 to 5000.
• Deduction for rent hiked sharply from Rs.24,000 to Rs.60,000
• Under National Pension Scheme withdrawals upto 40% exempt
• Deduction of Rs.50,000 for first home buyers on interest paid on loans upto Rs.35 lakhs and where value of house does not exceed Rs.50 lakh.
• All tobacco products to cost more
• Luxury cars to get costlier and tax on all cars hiked.
• No service tax for houses built under 60 sq.meters.
• Presumptive income tax scheme to be extended to all professionals with income of Rs.50 lakh with a presumption of 50% profit

For the farmer:

• Rs.35,984 crre allocated for agriculture
• To move from food security to doubling farmers income in the next 5 years
• To bring 28.5 lakh hectares under irrigation; AIBP allocation at Rs.17,000 crore
• 89 irrigation projects to be fast tracked
• Rs.15,000 crore for interest subvention on farm loans
• 5 lakh acres of land to be brought under organic farming in three years under Krishi Vikas Yojana
• Irrigation fund worth Rs.20,000 crore to be set up under NABARD
• Rs. 850 crore spend over the next couple of years on animal husbandry, cattle and livestock breeding
• Rs.412 allocated for organic farming
• Agriculture credit target at whopping Rs.9 trillion

For Rural Development:

• Rural Sadak Yojana gets allocation of Rs.19,000 crore for FY17
• Rs.8500 crore for rural electrification; target to have 100% rural electrification by 2018
• Rs.9000 crore towards Swacch Bharat
• Rs.2000 crore for LPG connection in the name of women in poor households
• Rs.87,765 crore for rural development
• To develop 300 ‘rurban’ clusters
• 228% jump in allocation to gram panchayats.
• Rs.38,500 crore, highest ever allocation under MNREGA

For Infrastructure sector:

• Rs.55,000 crore for roads and highways
• Rs.15,000 crore to be raised by NHAI via bonds in FY17
• Total outlay at Rs.97,000 crore for roads and highways
• 68 airports to be developed
• 10 out of the 25 non functional airstrips to be developed
• Nuclear power generation allocation at Rs.3000 crore
• To incentivize gas production in deep sea and ultra deep waters
• 100% FDI to be allowed on foods made and marketed in India

For Banking and finance sector:

• To introduce Bankruptcy code
• RBI Act to be amended to provide framework for Monetary Policy Code
• Rs.25,000 crore for bank recapitalization
• Govt keeps open the option to reduce its stake in IDBI to less than 50%
• To consider listing general insurance companies
• Sebi to develop new derivatives products in the Commodity market
• Target of disbursement under Mudra scheme increased to Rs.1.8 trillion
• Amendments to be made in Motor Vehicles Act to open up the road transport sector in the passenger segment.
• Reforms  in FDI policy in the areas of Insurance and Pension, Asset Reconstruction Companies, Stock Exchanges
• Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts.

For Governance and ease of doing business:

• Bill for Targeted Delivery of Financial and Other Subsidies, Benefits and Services by using the Aadhar framework to be introduced
• Introduce DBT on pilot basis for fertilizer.
• Automation facilities will be provided in 3 lakh fair price shops by March 2017.
• Amendments in Companies Act to improve enabling environment for start-ups.
• Price Stabilisation Fund with a corpus of Rs.900 crore to help maintain stable prices of Pulses.
• One-time dispute resolution scheme for retro tax cases
• To modify penalties schemes for non-payment of taxes
• No retrospective taxes in the future

For taxation:

• Excise duty on all tobacco products, except beedis hiked by 10-15%
• Luxury tax of 1% on cars costing more than Rs.10 lakh
• Infrastructure cess on cars - Small cars would attract a cess of 1%, cess of 2.5% is proposed on diesel vehicles and those with higher engine capacity at 4%.
• Krishi Kalyan Cess of 0.5% on all taxable services
• Service tax on single premium annuity to be reduced to 1.5% from 3.5%
• Higher rate of TDS to NRIs not having a PAN card will no longer apply if they produce a suitable alternate document
• 10% tax on dividends in excess of Rs 10 lakh received by individuals, HUFs; this will be in addition to DDT
• 45% tax (30% tax + 7.5% surcharge + 7.5% penalty) on undisclosed income declared under new window between June 1 and September 30, with no provision of scrutiny of book