Budget 2019 for investors and taxpayers

Taxpayers: Robbing Peter to pay Paul

Anand Kalyanaraman

Parvatha Vardhini C

Given that the interim Budget just five months back had given some sweeteners for the aam aadmi taxpayer, it was unlikely that Nirmala Sitharaman would loosen the purse strings so soon. So, expectedly, the Budget has not given additional relief in terms of increase in income slabs or deduction limits under Section 80C. Thankfully, there is also no increase in tax for the majority of taxpayers.

Robinhood tax

But the Budget has dealt a blow to the super-rich by increasing the tax surcharge sharply. For individuals whose taxable income is more than ₹2 crore and up to ₹5 crore, the surcharge on tax has been increased from 15 per cent to 25 per cent.

And for those whose taxable income is more than ₹5 crore, the surcharge has been increased from 15 per cent to 37 per cent.

With this, the maximum marginal tax rate will go up to 39 per cent for those in the ₹2 crore-5 crore taxable income bracket, and to 42.74 per cent for with taxable income over ₹5 crore. That’s an increase of about 3 percentage points and 7 percentage points respectively from the earlier maximum marginal tax rate of 35.88 per cent.

The hit can be substantial. For instance, an individual with taxable income of ₹2.1 crore will now pay ₹79.4 lakh as tax compared with about ₹73 lakh earlier. And someone with taxable income of ₹7.1 crore will now pay about ₹3 crore as tax, compared with ₹2.52 crore earlier.

The silver lining for both these rich taxpayer categories is the benefit of ‘marginal relief.’ So, the increase in income tax due to surcharge will not be higher than the actual increase in income above the thresholds (₹2 crore and ₹5 crore); in such cases, the surcharge will be restricted to the increased income. This benefit helps those with income marginally higher than the thresholds.

With these new surcharges, there are now five categories of taxpayers — those with taxable income of

a) up to ₹50 lakh (no surcharge);

b) more than ₹50 lakh and up to ₹1 crore (10 per cent surcharge); c) more than ₹1 crore and up to ₹2 crore (15 per cent surcharge); d) more than ₹2 crore and up to ₹5 crore (25 per cent surcharge); e) more than ₹5 crore (37 per cent surcharge).

Tax breaks

But this Budget was not just about higher tax incidence on the super-rich. There were many other takeaways too. So, for those seeking to buy affordable homes, the Budget has provided a good incentive. It has increased the interest deduction on loan taken up to March 31, 2020 for purchase of an affordable house (with value up to ₹45 lakh) by first-time home buyers. This deduction of up to ₹1.5 lakh is in addition to the existing interest deduction of up to ₹2 lakh on home loans — taking the total deduction benefit up to ₹3.5 lakh a year.

Besides, the Centre, in its drive to encourage adoption of electric vehicles, has provided interest deduction of up to ₹1.5 lakh a year to individuals who take a loan (on or before March 31, 2023) to buy such vehicles.

Feel-good moves

Also, the Budget did its bit to improve the “ease of living” for assessees by introducing pre-population of tax return forms and faceless e-assessments. While the personal information is usually auto filled in most e-returns, pre-filled tax returns with details of salary income, capital gains from securities, bank interests, and dividends and tax deductions will also be available from now on. E-assessments will help reduce harassment by tax officials in case your returns are taken up for further scrutiny.

If you are receiving a maturity payout from an insurance company where the premium paid during any year is more than 10 per cent of the sum assured, the receipt is taxable and TDS of 1 per cent is levied on the gross amount paid.

However, when you disclose such income in your tax return, you are required to disclose the net income (after deducing the premium paid from the total sum received). This leads to a mismatch between income as per the TDS return of the deductor (that is, the insurance company) and the income declared on your tax return. To weed out this anomaly, the Budget provides that a 5 per cent TDS will be charged on net income from September 1, 2019. This should help prevent possibility of tax disputes due to mismatch in incomes declared.

Tightening the noose

At the same time, several measures have been taken to widen the tax base, which puts the individual tax payer under the scanner. To keep track of high-value spends, the Budget has introduced mandatory return filing for certain persons, even if their incomes are below the taxable limit.

Thus, from assessment year 2020-21 onwards (for transactions/income during 2019-20), you will have to file your returns if you have deposited more than ₹1 crore in a current account, have spent more than ₹2 lakh on foreign travel for yourself or others or have paid an amount of ₹1 lakh or more towards electricity bills.

Besides, as per the current laws, a person claiming benefit of exemption from capital gains tax on investment in specified assets like house, bonds etc, is not required to furnish a return of income, if after the claim, his total income is below that taxable limit. Now, a return has to be filed if, before the claim, your total income is above the taxable limit.

Further, to keep tabs on high-value transactions entered into by those who don’t possess a PAN, quoting of Aadhaar number has now become mandatory from September 1, 2019. Also, cash withdrawals in excess of ₹1 crore in aggregate during a year from a bank/co-operative bank or post office will attract TDS of 2 per cent .

Sellers of immovable property (other than agricultural land) can now see more outflow on account of TDS, levied at 1 per cent of consideration.

This is because the definition of ‘consideration’ has been expanded to include club membership fee, car parking fee, electricity and water facility fees, maintenance fee or any other similar charges incidental to transfer of the immovable property.

Individuals providing contractual work or professional service will now see a TDS cut of 5 per cent on receipts/professional fee in excess of ₹50 lakh in aggregate in a year. All these TDS moves will also take effect from September 1, 2019.

Equity market: Towards a more liquid market

Lokeshwarri SK

Nirmala Sitharaman’s first Budget did not have much for investors looking for a short-term kicker. It would have been too optimistic to have expected any undue largesse from the FM, given the fiscal constraints. But the FM has addressed an important issue in the stock market — scarcity of floating stock. This was done through the proposal to increase public shareholding in listed companies from the current 25 per cent to 35 per cent.

While the failure to give relief on corporate tax is disappointing, the STT tweak will be useful to some traders. The efficacy of the social exchange will depend on how it is designed.

Increasing public shareholding

Low floating stock has been a niggling problem in the equity market over the years. With promoters holding around 48 per cent of the current shareholding, the shares available to other investors have been limited. This has resulted in the prices of stocks of companies with better fundamentals increasing, as these companies witness greater demand, even as supply is limited due to low floating stock.

To address this issue, SEBI’s minimum public shareholding rules had stipulated that listed companies have to maintain minimum 25 per cent of public shareholding at all times in equity and convertible debentures. Public sector companies have, however, been given time until August 2020 to meet the requirement. If the proposal in this Budget to increase the public shareholding is enforced, it will lead to more accurate price discovery. It will also give investors an opportunity to buy stocks with sounder fundamentals.

If we consider the listed companies with market capitalisation above ₹50 crore, which have disclosed their shareholding patterns up to December 2018, 650 out of 1,827 companies have promoter holdings between 65 and 75 per cent. These companies will have to offload extra shares to the public, amounting to around ₹2.37 lakh crore, if the rules are enforced.

Interestingly, about 250 companies have promoter shareholding between 74 and 75.6 per cent. Investors should take a closer look at this category of companies as the promoters seem to want to hold as much stake as permitted by legislation. Companies such as Dilip Buildcon, Symphony and Lumax fall in this group.

Many multi-national companies such as Gillette, 3M, Siemens, ABB, Whirlpool also have shareholding between 65 and 75 per cent, with the parent wanting to gain as much as possible from the faster growing Indian market. The only way these companies can sell their stakes is through regulatory orders.

There would be short-term pressure on stock prices as these shares are sold and that is perhaps why the stock market was also under duress on Friday. But the move will be beneficial over the long term. Also, the valuation of these companies can move down as the supply of shares increases.

The levy of a tax on buybacks by listed companies at 20 per cent is also a positive move for investors, as it would nudge companies to pay dividends, rather than resort to buybacks.

The STT tweak

The tweak to Securities Transaction Tax will not matter materially to traders. Prior to the Budget, when option contracts were exercised, the purchaser had to pay STT at 0.125 per cent of the settlement price. In case the option is not exercised, the seller has to pay STT at the rate of 0.05 per cent on the option premium.

Trading profit made by a trader who chose to exercise the option was 25 per cent lower compared to those who squared the position before the expiry, since the settlement price is far higher than the premium paid.

The Budget is now proposing to levy STT on the price differential between the settlement and the strike price in case of exercise of options. This change will ensure that the STT levy on exercising the option will be almost equal to the levy when options are squared.

This might let traders exercise their options instead of being in a hurry to square their positions prior to the expiry, thus causing undue turbulence ahead of the expiry day. While this is good, it would have been far better had STT been removed altogether in equity and equity mutual funds, in both cash and derivative trades, now that LTCG has been brought back for these transactions.

No relief in corporate tax

The failure to give relief to large companies on the corporate tax front is disappointing and it is hoped that the Centre would stick to its road-map of decreasing the tax rates for India Inc in the future.

The proposal for a social stock exchange is interesting. But given the low liquidity in alternative trading platforms such as SME platform or the innovator’s growth platform for startups, the regulator should pay attention to attracting liquidity to this platform.

The plan to review FPI limits in certain sectors could be useful for companies where foreign investor interest is high. Similarly, merging NRI and FPI limits can help companies give the unused portion of NRI limit in shareholding to FPIs.

Bond investors: Will the good news last?

Radhika Merwin

By keeping the fiscal deficit target at 3.3 per cent and retaining the gross market borrowings at ₹7.1 lakh crore for FY20, Finance Minister Nirmala Sitharaman has calmed jittery nerves. THe bond market cheered, and the yield on 10-year G-Sec fell by 10 bps. The Centre’s intention to raise part of the borrowings in external markets has also eased concerns on crowding-out private investments.

It will also lower pressure on interest rates in the domestic market, as there is a notable interest rate differential in borrowing overseas (more than 3-odd per cent).

However, this could expose borrowings to external volatilities, though the Centre’s cautious approach may mitigate the risk to a large extent.

The Budget has also laid down measures to deepen the bond market. This should aid it over the long run, though it’s still early days to gauge how these initiatives will pan out.

While on the face of it, the Budget seems to have checked all the right boxes for bond investors, the ride is likely to be bumpy, given the many ifs and buts in the Centre’s assumption of fiscal deficit and growth of the economy.

The chinks

Acknowledging the huge shortfall in income-tax collections in FY19, the Centre has lowered its FY20 estimate by about ₹51,000 crore, as against the projections laid down in the interim Budget.

The weak GST collections have also led to the Centre lowering its earlier estimate by about ₹97,000 crore for FY20. But the shortfall in tax collections has been offset by a higher assumption on disinvestments and dividend from the RBI.

Hence, without much tinkering on the receipts or the expenditure front, the Centre has managed to retain its 3.3 per cent fiscal deficit target for FY20.

But there are several weak links that can upset the Centre’s projection.

For one, even after reducing income-tax estimates for FY20, achieving the same appears a daunting task. Based on CGA provisional figures for FY19 (in which income tax grew by a modest 7 per cent), the growth in income-tax collections for FY20 works out to 23 per cent.

Given that income tax has grown by about 14 per cent annually over the past five years, there could be some slippage in collections — despite the higher surcharge imposed on the high-income earners.

Possibly, the Centre’s is banking on the additional surplus dole-out by the RBI to make up for the shortfall on the tax front. While the Budget has already pencilled in a higher dividend from the RBI (about ₹23,000 crore more than estimated in the interim Budget), it does not entirely take into account possible windfalls from the RBI’s coffers.

However, the greater risk of slippages on the fiscal deficit front comes from the very optimistic growth number factored in by the Centre. The real GDP growth stood at 6.8 per cent in FY19.

Even if we assume growth of 7 per cent in FY20, as projected by the Economic Survey 2018-19 (though we believe that growth will slip lower in the current fiscal) and inflation of 4-odd per cent, the 12 per cent nominal GDP growth assumption in the fiscal arithmetic, seems a tall task.

As such, tax buoyancy could come under pressure in FY20, due to slower growth in nominal GDP (our assumption of nominal GDP growth is about 10.5 per cent from 11.2 per cent in FY19).

Other measures

There has been talk of deepening the Indian bond market. The proposal to allow AA-rated bonds as collateral for tri-party repo through stock exchanges is welcome.

While this should lead to more liquidity for AA-rated bonds in the secondary market, given the still weak liquidity of AAA-rated bonds despite such measures, it may be too early to gauge the impact.

The proposal for inter-operability of the RBI and SEBI depositories could be a big positive for bond investors. This will allow retail investors to purchase G-Secs and keep them in their demat accounts.

COMMENT NOW