It was a budget with high expectations and set against the backdrop of a tight monetary situation. The government had fallen short of its direct and indirect tax targets by nearly Rs.2 trillion and is likely to fall short of its divestment targets too. It is in these conditions that the Union Budget 2020 was presented by the Finance Minister.
No relief on LTCG tax
That was the big expectation from the Union Budget 2020. The LTCG at 10% was introduced in the 2018 budget and had contributed little by way of added revenues. Markets were hoping against hope that this would be scrapped as the LTCG tax was distorting long term wealth creation, especially through the mutual funds route. However, the FM has chosen to maintain the status quo on the LTCG tax, which means long term gain on equity, will be taxed at 10%.
DDT on dividends scrapped
In an interesting move, the budget has scrapped the dividend distribution tax on equities. However, this has been replaced with a tax on dividends in the hands of the investor. Now, such equity dividends will be treated as other income in the hands of the investor and taxed at the peak rate applicable. Most promoters and HNI investors may end up paying a steep tax of as high as 43.5% tax on their dividend income. This could impact the dividend payouts.
Real boost for consumption
One of the underlying themes of the Union Budget was whether it will give a boost to consumption. If you look at the reaction of the consumption stocks, they have surely given a thumbs-up. Budget 2020 has proposed a dual tax regime where taxpayers have the choice to opt for a lower tax regime by forgoing all exemptions. Market watchers feel that this will largely benefit persons earning less than Rs.15 lakhs per annum. The budget estimates that this group has a marginal propensity to consume of 0.70, which could result in a consumption impact of Rs.1.33 trillion. If that does happen, it could be a big thrust for the consumption story in Indian markets.
It’s Market friendly too
While LTCG may have disappointed, the budget has given weightage to the infra story. The budget has reiterated the Rs.103 trillion commitments to creating world-class infrastructure in India. It has also laid out a massive plan for 100 additional airports, an arterial road network and privatization of stations and one large port. In addition, the budget has also committed to the much needed post-harvest infrastructure as well as reiterating its commitment to doubling farm incomes by 2022. There seems to be too much ado about LTCG tax and DDT. At a more structural level, this budget does provide the much-needed boost to equity markets!