Policy Action - Building on the Budget FY 2019-20.pdf• Super Rich Tax –Surcharge on individual...
Transcript of Policy Action - Building on the Budget FY 2019-20.pdf• Super Rich Tax –Surcharge on individual...
1
Policy Action - Building on the
Groundwork
In its first major podium after elections, the returning
government has reiterated its reformist agenda by
laying out 10 point mission statement. The agenda
aims to combine its societal agenda for better living
standards for all with capitalist ideals of active private
partnerships as India lays the groundwork to become
a US$5 trillion economy in the next few years. The
emphasis is clearly on a long term structural shift
rather than short term spike in GDP growth rates.
Key highlights
• Fiscal deficit maintained at 3.3%
• Re-emphasis on Affordable Housing
o Increased benefits for home buyers of affordable
housing through tax deductions
o Model tenancy laws – Boon for people living in
rented properties
• Overseas government borrowings in foreign currency to
alleviate pressure on domestic bond market and
stabilize currency reserves.
• Super Rich Tax – Surcharge on individual income tax
for individuals earning above Rs. 2 Cr
• Minimum public shareholding in listed firms proposed to
be increased to 35% from 25%.
• Make In India – Tax exemptions for sunrise and
advanced technology areas
• Angel Tax – Start-ups and investors who file requisite
declarations and provide information in their returns not
to be subjected to scrutiny in respect of valuations of
share premiums. E-verification will be done to avoid
hassles to startups.
• Electric Vehicles – Tax Incentives for production &
ownership of EV’s
• Reduction of corporate tax rate for companies with a
turnover of upto Rs 400 Cr.
• Divestment target at Rs. 1,05,000 Cr
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Encouraging Foreign Participation
The government has identified the need to raise large
amounts of capital to fund growth and infrastructre at low
cost. Further, the need to fund startups and emerging
technologies vital for import subsitution and self
sufficiency have not gone unnoticed. For this purpose the
union budget encompases a slew of benefits to encourage
foreign capital flows. The government has also proposed
easing operational concerns of foreign investors doing
business
• Relaxation in norms for KYC of foreign investors
• 100% FDI for insurance intermediaries. FDI caps in
other sectors like aviation, media and insurance will be
relooked
• Permit investments made by FIIs/FPIs in debt securities
issued by Infrastructure Debt Fund – Non-Bank Finance
Companies (IDF-NBFCs) to be transferred/sold to any
domestic investor within the specified lock-in period.
• FPI will be permitted to invest in debt instruments
issued by REITs & InvITs
• NRI portfolio scheme route and FPI route to be merged
Fillip To Retail Investing In Financial
Markets
With an eye to channelize domestic savings into the
equity and debt markets, the union budget has proposed
incentives to deepen the financial markets
• Provide benefits in line with equity linked savings
schemes (ELSS) to ETFs to promote long term retail
ownership
• Make necessary changes to the infrastructure of
depositories to allow retail investors to trade T-Bills
• Increase minimum public shareholding in listed entities
to 35%. This is likely to lead to fresh issuances by
promoters amounting to roughly Rs. 3.5 lakh crore
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Personal Taxes
The government commended taxpayers as tax
collection revenues saw double digit YoY growth
during the last 5 years. While the government did not
change core tax slabs or rates, it focused on
seamless compliance and redressal mechanisms
Key proposals
• Interoperability of PAN & Adhaar for filing income tax
returns
• Redressal for scrutiny & errors to be made seamless
and online. Faceless e-assessment for verification and
transaction discrepancies
• Prefilled income tax returns based on information from
employers, banks, mutual funds, stock brokers and
other financial intermediaries for the purpose of correct
and seamless computation of incomes from salary,
bank interest & capital gains.
Apart from this the government aims to incentivise home
ownership and electric vehicles (EVs)
• Additional income tax deduction up to Rs 1.5 lakh on
interest on loans taken to purchase electric vehicles.
This amounts to a benefit of ~Rs 2.5 lakhs over the
loan period
• Lower GST on electric vehicle components to 5%
• Additional deduction over and above the Rs 1.5 lakh
deduction for interest on affordable housing loans
borrowed up to March 2020.
The government increased surcharge on individuals
whose taxable income is between Rs. 2 Cr and 5 Cr to
25% and those above Rs. 5 Cr to 37%
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Business - Kickstarting Domestic
Manufacturing
With a view to develop a strong manufacturing base and
extend the Make in India campaign, the government has
proposed long term tax incentives for manufacturing hubs.
• Corporate Tax rate for companies with a turnover of up
to Rs 400 Cr reduced to 25%. For new manufacturing
companies there is no turnover limit.
• Investment linked tax exemptions U/s 35AD and other
indirect tax benefits to companies setting up large scale
manufacturing plants in industries like Semi-conductor
Fabrication (FAB), Solar Photo Voltaic cells, Lithium
storage batteries, Solar electric charging infrastructure,
Computer Servers, Laptops, etc.
• Imposition of customs duty on import of key electronics
and building material to promote domestic
manufacturing
• Relax rules for set off and carry forward of losses for
start ups
Other Initiatives
• In order to prevent the use of cash for business
payments, a TDS of 2% is proposed on withdrawal of
cash in excess of Rs 1 Cr in a given financial year from
bank.
• Incentivise digital payments by waiving digital
transaction charges
For a complete list of sector wise impact of the budget
refer the end of the document.
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Equity Outlook
The government’s agenda of inclusive long term growth is
evident in the policies announced in today’s budget. From
a equity market standpoint the budget was a largely non-
event. The change in minimum public shareholding is
likely to have a bearing on the markets in the near term.
Timelines for such divesture and SEBI rules regarding
such divesture will be keenly awaited by the market. Also
the companies have actively engaged in buybacks are
likely to be impacted on the proposed buyback tax.
Renewed interest on infrastructure development and bold
policy actions around recapitalization of PSU banks and
rejuvenating the NBFC sector are widely seen as positive
steps in pump priming liquidity to the economy.
Debt Outlook
The fiscal deficit at 3.3% in line with the commitment set
out by the government is a big positive for the markets.
Further the intention of the government to tap the
overseas debt markets to finance government deficits will
be viewed positively by the debt and currency markets.
Overseas borrowing in foreign currency is likely to come
at a lower cost and will create additional forex buffers and
simultaneously stabilize the INR. It also means that supply
of G-Secs in the domestic debt market will reduce. This
direction is a big positive for other borrowers who are
likely to get better funding terms.
Reacting to the budget, long bonds saw a sharp rally. The
10 year G-Sec yields fell 15 basis points intraday as the
government surprised the street by sticking to the 3.3%
fiscal deficit. Going forward, we believe the duration story
in government long bonds has largely played out and see
limited opportunities in this space.
Given the current liquidity conditions and the market
environment, we prefer the short end of the curve and like
the current spreads in 2-3 year corporate bonds segment.
150-175 bps looks very attractive from risk reward
perspective. Also investors who understand credit risk and
are ok with some short term volatility should invest in
highly diversified largely AA oriented credit funds as we
see AA spreads widening over the AAA curve making
them attractive bets from a risk reward perspective.6
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Auto & Auto Ancillaries
• The budget mainly focused on the promotion of Electric Vehicles
• The Government has moved the GST council to lower the GST rate
on electric vehicles(EV) from 12% to 5%
• An additional Income Tax deduction of Rs1.5 lakhs on interest paid
on EV loans
• Components of EV that will not be levied a custom duty: E-drive
assemblies, On board chargers, E-Compressors, Charging Gun
• Various small auto parts have seen increase in custom duty. Overall
the impact of increase in custom duty on these parts in the range of
2.5% to 5% will have negligible impact
• Impact on tire companies due increase in custom duties for Butyl
Rubber
• Butyl Rubber is a type of synthetic rubber (SBR), primarily used in
tires for inner tubes. Although we don’t have the break up
contribution of BR in SBR, we believe it could be around 10-15% of
overall SBR basket. Overall, SBR accounts for ~35% of RM basket
which is 60% of sales. Hence overall impact of 5% increase in
custom duty should have around 20 bps impact on margins of tire
companies
• Impact on Auto Companies due to increase in Minimum Public
Shareholding to 35%.
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Banking & Financial Services
• Proposing to return regulatory authority from NHB to RBI –
necessary proposals are placed in finance bill – this is structurally
positive in long term as it improves regulatory supervision and
improves governance for NBFCs
• Government will provide Rs 1 lakh crore for the purchase of highly
rated pool assets of financially sound NBFCs – this will be through
one-time 6 months partial credit guarantee for first loss up to 10 -
since its highly rated pools and that too for financial sound NBFCs,
better rated NBFCs would be able to bargain better rates with this
credit enhancement facility.
• Interest rebate that was available to banks on certain bad and
doubtful assets will now be available to NBFCs as well - will
effectively bring down effective tax rate but will be more of a timing
difference.
• Increasing the deduction limit for interest on self-occupied house
property from Rs 2 lakhs to Rs 3.5 lakhs – this is for cost of houses
upto Rs 45 lakhs - brings down effective interest rate by almost 2%
points and will benefit affordable housing financiers
• Rs 70,000 Cr of recapitalization will be provided to PSU banks –
higher than expectations of Rs 40,000 Cr but still much less than
actual required numbers
• Evaluate FDI limit hike for insurance companies and allowance of
100% FDI permitted for insurance intermediaries
Power Sector
• Implement high powered committee's recommendation for PSDF
supported e-RLNG scheme for stressed gas plants. Positive for
Torrent Power with 1.5GW of stranded gas capacity
• Remove CSS, duties and taxes on open access and captive power.
Further improve UDAY scheme, bring a package for power sector
tariff reforms. However, no details provided.
• Considering including government stake in PSUs inclusive of stakes
held through govt. controlled entities.
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Agriculture & Allied Businesses
Current Status Proposals Impact
Allocation to Agriculture
and Allied Activities
Increased from Rs866bn to
Rs1515bn
Positive for All Agri Players
Fertiliser subsidy at
Rs700bn
Subsidy increased by 14%
YoY from INR 700bn to
INR800bn
Increase in subsidy is
positive for the industry as
a whole. As urea subsidy
has been increased by
19% YoY to INR 536bn,
while the Nutirent based
subsidy has been
increased by 5% to INR
264bn.
Pradhan Mantri Fasal
Bima Yojana allocation at
Rs129bn (RE)
Allocation increased by 8%
to Rs140bn
Positive for agri input
sector
MNREGA outlay at
INR550bn
MNREGA outlay increased
from INR550bn to INR
600bn
Positive for agri input
companies
Interest subsidy for short
term credit to farmers at
INR150bn
Interest subsidy for short
term credit to farmers has
been increased from
INR150bn to INR180 bn
Positive for agri input
companies
Scheme for assistance to
sugar mills for the season
2018-19
Scheme for assistance to
sugar mills for the season
2018-19 from Nil to
INR10bn
Positve for sugar
companies
Increase in the public
shareholding for listed
companies
To be increased from 25%
currenctly to 35%
Negative for companies
where promoter's holding
are more than 75%.
Imposition of 20% tax on
Buy back of Shares
Imposed 20% tax on buy
back from NIL previously
Negative for the sector as
most of the agri companies
were more into buy back.
Direct Benefit Transfer
(DBT) in urea
Surprisingly no mention of
DBT
Neutral
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Consumer Sector
• Increase in custom duty for PVC and tiles helps domestic
manufacturers as anti-dumping duty was getting over in June end.
• Excise duty on cigarettes introduced at Rs5/1000 sticks – not a big
as far as amount is concerned, sentimentally negative
• Hike in gold customs duty to 12.5%. Gold retailers and distributors
are likely to benefit from rising prices and improved pricing power.
• Increase in custom duty for palm oil and fatty acids by 7.5% - may
need price hikes of 1.5-2% for soap manufacturers.
Information Technology
• Buyback tax of 20% on listed companies – this effectively removes
tax advantage of buybacks over dividends:
• Most large IT players have all conducted buybacks in the last few
years. They may still continue to return cash possibly as dividends
(less hassle than buybacks), but will have to set aside 20% of it to
pay taxes.
• Proposal to be worked with SEBI to reduce maximum promoter
holding to 65% from the current 75% - promoters may need to sell
down stakes to comply, if the proposal goes through.
Real Estate Sector
• Further incentives to affordable housing: First time home buyers
can claim an income tax deduction of up to Rs. 1,50,000 (from Rs
50,000 earlier) on home loan interest paid for apartments with ticket
size up to Rs 45 lakhs. This deduction will be over and above the
Rs 2 lakhs limit under the Section 24 of the Income Tax Act. – Key
beneficiaries are affordable housing developers. Price of affordable
housing has been capped at INR 4.5mn.
• Rental housing: A Model tenancy law will be finalized and sent to
states. FPIs will be permitted to in REITs. RBI to get more power to
regulate housing finance companies
• For the calculation of TDS on purchase of immovable property, the
consideration shall include other charges in the nature of club
membership fee, car parking fee, electricity and water facility fee,
maintenance fee, advance fee or any other charges of similar
nature which are incidental to the purchase of immovable property -
Will increase the overall cost of house. Target of 1.95 cr houses
proposed to be built under PMAY Grameen between 2019-20 to
2021-22 has been maintained11
Oil & Gas Sector
• The FY20 subsidy remains unchanged from the interim budget Rs
375 bn entailing a shortfall of Rs 233 bn for FY20. This implies that
the high level of subsidy dues owed to the oil marketing companies
will sustain and will not go down significantly (with implications of
higher working capital and interest costs). Unless more provision is
made later in the year, there would be a perceived risk of upstream
players having to bear the subsidy as well.
• Excise duty on gasoline and diesel have been increased by
Rs2/litre - Rs 1/litre of Special Additional excise duty and road cess
of Rs 1/litre. Basically, Government has reversed the cuts made
over last 2 years (Rs2/l cut in Oct17 and Rs1.5/l cut in Oct18).
While the same should be passed on by the OMC, this leaves less
cushion with OMCs in case global crude price start moving up. The
additional excise duty is expected to generate revenue of Rs ~312
bn.
• The divestment target has been raised to Rs 1050 bn. The Budget
also mentioned about strategic sale of PSUs. Government will also
continue to do consolidation of PSU in non-financials space as well.
Budget speech mentions about Government is considering, in case
where the Undertaking is still to be retained in Government control,
to go below 51% to an appropriate level on case to case basis.
Government has also decided to modify present policy of retaining
51% Government stake to retaining 51% stake inclusive of the
stake of Government controlled institutions. This entails that FPO
and cross selling of PSU can continue.
• An import duty of Rs1/tonne on crude oil has been introduced. This
levy is nominal and has no impact.
• There have been duty changes in petrochemical products (Naphtha
and PVC) which do not have any significant impact
Roads
• NHAI allocation increased by 6% YoY growth to Rs830 bn.
• Gross Budgetary support has gone up to Rs. 720bn in FY20 from
Rs685bn in FY19 (R.E.) and Rs. 507bn Cr (actual) in FY18
• IEBR has gone up up to Rs. 750 bn in FY20 from Rs620bn in FY19
(R.E.) and Rs505.32 bn in FY18
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Healthcare Sector
• Net healthcare expenditure allocation increased by ~15% y/y but as
a proportion of total budgeted expenditure, it remained flat at ~2.2%.
• Jan Aushadhi spending budgeted at Rs 420 mn, same as last year.
• Ayushman Bharat spending budgeted at Rs 64,000 mn, significant
increase from Rs 24,000 mn last year. The scheme was launched in
Sep’18 and hence received smaller allocation last year.
• Health and wellness centre (HWC) allocation has been increased by
~28% y/y to Rs16,000mn. Of this ~Rs13,500mn will be allocated for
Rural HWCs and remaining Rs2,500m for Urban HWCs. The
government shared its plan to open 1.5 lac HWCs at the time of
Ayushman Bharat unveiling. Till now, 8,000+ HWCs have been
opened.
• Govt. has allocated Rs 2,060 mn towards strengthening of State
drug regulatory system, which in our view will be utilized towards set
up of Price Monitoring and Research Units (PRMUs). PRMUs will
monitor and implement pricing changes in pharmaceuticals. Till now,
7 states have set up PRMUs.
Railways
• Total budget support to Indian Railways for FY20E has gone up by
23% to Rs. 680.2bn – CAPEX into New Line construction has
declined by 9% YoY to Rs. 72.6bn, Track Renewals is flat at Rs.
101.2bn, Gauge conversion is up by 10% to Rs. 22bn and Track
Doubling is up by 19% to 7bn; Significant increase (30%) in
allocation for ROB/RUBs from the interim budget has been
witnessed; including this total Investments into Indian Railways for
FY19E along with IEBR has gone up by 26% to 750.9bn.
• Total budgetary support to Metro and MRTS projects is up 19% YoY
to Rs. 177bn. CAPEX into MRTS and Metro projects is up 23% YoY
to Rs. 192bn, PMAY is up by 5% to Rs. 68.5bn, AMRUT and Smart
Cities projects are up by 14% and 5% to Rs. 73bn and Rs. 65bn
respectively. Total Budgetary allocation under the ministry is up by
12% YoY. Allocation to Smart cities mission has witnessed a decline
from interim allocation while allocation to DAY-NULM scheme has
increased.
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Defence Sector
• Total capital outlay on Defence services is up 10% YoY to Rs. 1tn
with almost equal growth in allocation across Army, Navy and Air
force. Emphasis has been laid on purchase of Heavy & Medium
vehicles and naval dockyards with a 23% and 27% YoY growth
respectively. Allocation for purchase of Aircraft has been flat for last
3 years at Rs. 293bn. Other Equipment purchases increased by
17% YoY to Rs. 335bn.
• There has been no large change in allocation of budgets for the
roads, railways and defence sector which was envisaged in the
interim budget in February 2019. We believe capex will remain
strong in Road sector followed by railways (capital expenditure in
metro will increase).
Consumer Durables
• Increase in Custom duty on ODU (Outdoor unit) and IDU (Indoor
unit) for room ACs from 10% to 20%. This follows an increase in
customs duty on Completely Built Units (CBUs) last year from 10%
to 20%. The negative impact could be in range of 2-3% of cost
which will be absorbed by price hikes.
Cement Sector
• On Budget FY20, no meaningful changes in allocations across
construction related sectors versus what was talked about in the
interim budget.
• In Budget speech today, FM talked about construction of 1.95cr
rural houses in phase-2 of PMAY rural by FY22. This was known to
market earlier but probably by FY23 (i.e. 2022). Govt has completed
0.75cr houses in PMAY rural in FY18-19 combined versus Phase-1
target of 1cr houses. This expectation of increased allocation (i.e.
faster completion) of PMAY-rural houses isn’t reflecting in the
Budget fine print numbers
Metals Sector
• Custom duty on silver from 10% to 12.5%, marginally positive to
Hindustan Zinc (silver revenues were Rs. 2,500cr in FY19)
• Custom duty on stainless and alloy steel from 5% to 7.5% likely to
benefit alloy steel manufacturers14
Source: Axis AMC Internal Analysis, Budget Documents 2019.
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The above changes to taxation is subject to presidential assent to
the finance bill 2019. The document has been prepared on the
basis on the budget documents published by the ministry of
finance and should not be used for tax planning given the
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