Despite being the last full budget for the NDA government before the general elections next year, the finance minister walked a fiscal tight-rope to present a balanced budget wherein he proposed various measures for the social, rural and infrastructure sectors, besides incentives for senior citizens, corporate and the salaried class. A key announcement was the launch of a flagship National Health Protection Scheme to cover over 10 crore poor and vulnerable families (about 50 crore beneficiaries) providing secondary and tertiary care hospitalisation coverage upto Rs.5 lakh per family per year.

The anticipated re-introduction of long term capital gains (LTCG) tax on equities was announced with a 10% tax on LTCG without indexation benefits provided the gains exceed Rs.1 lakh. Only gains earned post January 31, 2018 would be charged to tax. While securities transaction tax (STT) was introduced in 2004 in lieu of LTCG, it remains to be seen how long both forms of tax will be charged in unison. Introduction of LTCG tax may lead to moderation in asset prices as the market factors in a lower level of realized post-tax returns. The budget also brought the dividend distributed by equity oriented funds under the tax net with a 10% dividend distribution tax (DDT). Thus equity oriented funds would now be taxed irrespective of growth or a dividend option as well as across investment horizons. Introduction of DDT may help to curtail the current inappropriate practice of purchasing equity oriented hybrid funds for the lure of regular dividends. However, by not bringing equity-oriented ULIPs (Unit Linked Insurance Plans) under the ambit of LTCG, the budget has introduced an undesirable tax arbitrage which may drive investors towards ULIPs which may not be in their best interest.

Besides taxing of equity funds, the budget showed a focus on developing the bond markets. Large corporates being nudged to meet about one-fourth of their financing needs from the bond market and permitting bonds with an ‘A’ rating to be treated as eligible investment securities (vis-à-vis ‘AA’ rated bonds currently) should help deepen and diversify the corporate bond market. The government’s willingness to explore the Debt ETF route for its PSU disinvestment program is also a positive development in this regard. However, concerns about rising inflation, a rate hike, deviation from the fiscal glide path and narrowing liquidity surplus resulted in the 10 year G-Sec yield moving up by 18 bps post the budget announcement.

Senior citizens cheered the incentives on additional exemption on interest income from bank and postal deposits, a higher investment limit in an assured return government backed pension scheme and higher tax benefit limits for health insurance premium. Standard deduction also made a comeback for the salaried class after it was abolished in 2005.

The budget was very positive on the infrastructure front with the outlay increased by 20% from Rs.5 lakh cr (approx.) to Rs.6 lakh cr. This will include roads, railways, airports, smart cities, besides digital infrastructure. This coupled with the thrust on affordable housing reiterates the government’s emphasis on achieving the twin objective of growth and employment generation.

What I missed in the budget was a thrust on augmenting private sector capex, and initiatives to improve the health of the housing construction sector (for urban middle class). A focus on enabling retirement savings via Mutual Fund Linked Retirement Plans (MFLRP) is also a missed opportunity. Such a scheme can play a significant role in improving the footprint of mutual funds as a long term investment product and help channelize household savings to capital markets.

Nevertheless, I commend the budget for the balance shown between populist measures and fiscal prudence. – Sanjay Sapre.

 

Guest Author : Sanjay Sapre, President, Franklin Templeton India

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