Mon, 29 Jan 2018
FM won't bring LTCG to disrupt markets, but will plug loopholes

There are basically two things stock market investors will be looking forward to in Budget 2018-19 - a continued commitment to fiscal consolidation and no additional tax burden on capital market investments.

On the former, I expect Finance Minister Arun Jaitley to stick to the 3 percent fiscal deficit target for FY19. While the government is widely expected to overshoot the FY18 target, the maths still seem workable for maintaining the next year's mark. It's pertinent to note that it would still be among the lowest deficit levels in the last three decades. 

About the latter, in what's a recurring pre-Budget fear each year, there's a possibility of the government maintaining status quo. But if it decides to address the issue, I hope it tries to revise and align taxes, not merely to add yet another income source. 

On the spending front, despite being just 15 months away from elections, I expect the finance minister to be pragmatic and focus on asset creation and measures that boost economic activity like infrastructure rather than wasteful spending. 

We are reassured of this when the Prime Minister, in a recent interview, stated that it was a myth that the common man expects freebies and sops. One of the highlights that we may witness in this Budget could possibly be of increased self-sufficiency of railways, which will seek to generate internal resources to fund its future plans. 

The government's income projections have been consistently plausible in the past few years. This time I expect slightly more aggressive estimates, which the government would strive to meet by the widening of tax base and imposing penalties on the basis of demonetisation data and high disinvestment income. Overall, I expect a well-balanced Budget. I would also like to underline the fact that the Budget won't be the sole platform for launching reforms and we could see a string of positive measures from the government during the course of the year. 

Here's a closer look at some of the key areas of the Budget: 

Direct taxation The government would lower corporate tax rates, especially at a time when the US is about to opt for lower rates, which underlines the need to become more competitive in offering a conducive environment to the best of breed companies to set up base in India. 

Also, the fact remains that we squarely depend on FDI flow to fund our current account deficit. On personal income tax rates, the government would provide relief to taxpayers who had to face a difficult time during the demonetisation disruption span. 

We can expect some extra benefit under Section 80C, apart from the raising of individual-specific tax slabs. On its tax collection estimates, the government would prefer to be slightly more aggressive than before, but of course, without losing sight of the realism that they have maintained in their estimates till date. We could well see a higher tax income collection target, more so in expectation of a windfall in the form of penalties post demonetisation, with all the data mining in process and given the strong intent to widen the income tax base. 

Capital market taxation 
In the run-up to every Union Budget announcement, fear of levy of long-term capital gains tax (LTCG), GAAR, haunt the stock market. This year is no different, with fear of an end to the exemption of LTCG on equity investments. I reckon that the government will not like to dent the improving investor sentiment where equity participation still remains low around 5-6% of the household savings. 

Having said that, it could change the long-term capital gain classification criteria from one year to two years. But in the same breath, the government must then have a serious relook at STT, abolish Dividend Distribution Tax (DDT) as also reduce GST rates on share transactions to 12 percent, from 18 percent. We may also see the Budget plug some loopholes like bonus stripping. 

Indirect taxation 
Material action may not be seen since GST is now driving most of the government intent and rates are being reviewed in a reactionary fashion - as and when the government feels rates need to be hiked or lowered on specific items. Customs duty may be tweaked though to benefit certain domestic industries. I see little risk to indirect tax collection from spike in crude in the last few months. Our internal assessment foresees no material rise in crude oil prices from here on. 

On the issue of fuel prices, the government may blend methanol with petrol to the extent of 15 percent to lower the incidence of fuel prices on the retail audience without having to materially cut taxation at their end. This blend, of course, can be achieved outside the Budget too, and may not necessarily feature as a Budget measure. 

The larger point is that the government would continue to be upbeat about indirect tax collection this time around. 

Fiscal Deficit 
Given the landmark disruptions of the year as also the corporate slowdown, we can expect FY18 to go slightly off the mark, with a slippage of 10-20 basis points. But in the larger context of what the government has achieved on the fiscal discipline front, we can easily condone the slippage. 

I expect the government to reiterate its commitment to fiscal consolidation by continuing to aim at 3 percent target for FY19. This is because it would like to signal low interest rates to the market as well as live up to expectations of global rating agencies that upgraded India rating. 

Besides, the debt-to-GDP ratio at ~70% is on the higher side and state finances are stressed. So, there's clearly a need for proactively ensuring discipline of the fiscal front. It's pertinent to note that the proposed recapitalisation bonds would be below-the-line item with no impact on the fiscal deficit, except for the interest component, which is not significant in FY19. 

Disinvestment programme 
Apart from a push to increase non-tax revenue in the form of dividends to meet the deficit target, I expect a large disinvestment programme in FY19. Given that the government prodigiously met the target for this year, its resolve has been amply demonstrated, and hence we can expect a high figure for the coming year as well. 

Our internal forecast is for 25 percent return for the Nifty and the Sensex in 2018. So capital market will likely remain supportive of the government in meeting its target. 

Overall, the government will control spend on non-Plan expenditure (although it has done away with the distinction between Plan and non-Plan). It would focus on boosting economic while trying to minimise revenue expenditure. 

Areas like infrastructure and affordable housing, healthcare, job creation and rural development would get attention. I even see a possibility of hike in minimum wages and farmer MSPs. 

Another way of saving expenditure will be to ask certain departments to increasingly fund their own capex. For instance, with Piyush Goyal at the helm (who was appreciated in his work as Power Minister), the railways may look to raise resources internally through prudent measures like sale & lease back of transmission lines and land bank monetisation. 

So, the government can now afford to stick to last year's railway allocations or probably allot a marginally higher sum to it. Save for arresting wasteful expenditure, it would be difficult to control total expenditure in a year before elections. 

Source: Economic Times

Last updated by: anil.mascarenhas on Mon, 29 Jan 2018 2:22 PM