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04 Feb 2020 by Harsh Ashar
Interpretation of Budget 2020

As always, the budget has evoked mixed responses from the general public as well as Indian stock market investors. To help you better understand certain key announcements of the budget and its potential impact I have decided to decode it in a simplified manner.

Let me start with big picture first.

Decoding Fiscal Prudence

The government receipts for the current fiscal are expected to be approx. Rs. 20 Lakh crore and this is expected to rise to approximate Rs. 22 lakh crore for the FY20-21.

The broad break-up of this 22 lakh crore for the next year is:

  • Around Rs. 16 lakh crore as taxes
  • Rs. 4 lakh crore as income for the services it provides (Railways, telecom, etc.) and
  • Around Rs. 2 lakh crore is the disinvestment target they have set for FY20-21

With this, the annual expenses for the government are expected to be around Rs. 30 lakh crore. The broad break-up for them is:

  • Around Rs. 4 lakh crore on capital expenditures
  • Rs. 10 lakh crore on subsidies and interest
  • Around Rs. 4 lakh crore would be allocated to defence and
  • Remaining would be spent across various existing and new schemes

If you look at the numbers closely, yes, that’s a fiscal gap (receipts – expenditure) of around Rs. 8 lakh crore for the coming year.

Now before you jump to conclusions, there are 2 ways to look at reducing this gap:

  1. The government aims to improve its revenue targets
  2. The government aims to reduce its capital expenditures or reduce on expenditures on various existing or new welfare schemes announced

The government has instead gone ahead with the third option – allow extra burden of 0.5% on the fiscal deficit. 

Is This A Good Or A Bad Move?

Let us agree, as of now, a growth of even 10% in revenue collection, especially in the current scheme of things, seems an ambitious target. Coming to expenses, if the government reduces its capital expenditure, it would have a greater negative effect on the economy. In fact, the government, has spent around Rs. 3.4 lakh crore on capital expenditure this year, has decided to up its capital spending by over 17% and raise it to around Rs. 4 lakh crore.

If the government raises its capital spending especially during the times of lack of investor confidence, it would act as a confidence booster to the private investments and in turn act as a catalyst to promote higher investments.

The other positive I see here is that the government has taken a firm approach that it does not intend to go for a populist budget by increasing spends on subsidies or add newer sops.

The better way to look at it from my perspective is that the government is firm on its $5 trillion goal. And is taking all possible steps to maintain STABILITY & CONTINUITY in that direction. 

LTCG & DDT- Good or Bad for Indian Stock Market Investors?

The next on the discussion list has been LTCG. The government had set a target of Rs. 40,000 crore when it reintroduced the tax in 2018. The collection for the same is said to be much lower than its target for the current fiscal.

Neither have the Indian stock market investors really paid LTCG, nor has the government collected a significant amount as LTCG, then what is this hue & cry all about?

Thinking from a stock market investor’s perspective, speaking in the form of an example, if I am investing Rs. 10 lakh, after 3 years, if my investments have grown to say Rs. 20 lakh, I would have to pay Rs. 90,000 as LTCG (LTCG of 10% is imposed only on profits of above Rs. 1 lakh). Would I not go for stock market investments that are giving me returns that beat all other investment options by a big margin only because there is a 10% tax?

Similarly, coming to DDT, many Indian stock market investors are having negative perceptions on the decision taken. Presently, DDT is payable by the company on dividend distributed/paid to the shareholders and it is tax free income in the hands of the shareholders. With the new announcement, the company would not have to pay any tax on dividends, but it would be taxable in the hands of the shareholders.

Let me explain this with an example, currently dividend income is stated to be in the range of around 2% of the value of investments. This means if you are holding shares worth Rs. 10 lakh, you could receive dividends somewhere in the range of 2%, i.e., Rs. 20,000. Let's assume the company passes on the entire benefit of DDT tax savings to its shareholders; the dividend you would receive would increase to Rs. 25,000. If you fall in the income range of less than Rs. 15 lakh per annum, it is an obvious benefit to you.

1. Consider this, retail stock market investors in India hold a small number of shares, whereas the promoters/founders hold a much larger portion. Hence, the company would surely not want to affect the promoters this way. This would in turn result into them using that money to either invest in expansion of the company or even consider buyback of shares. In event of either, it would be beneficial to the shareholders.

2. Coming on to the second reason, we also need to understand that the reversal of DDT is done considering it would attract more foreign investment in India. In the current scheme of things, if a company gave dividend to its shareholders, it would deduct DDT and then give away the money to them.

3. For foreign investors, they would not get any credit for the amount deducted as DDT and the dividend income would be taxable in their country. With this announcement, the company would only have to deduct a Withholding Tax and pass on the remaining amount as dividend. And yes, they would be able to claim a credit of this in their country as well. This would give a direct boost to foreign investments in the stock markets.

4. The other confusion around this is that the companies, while paying dividends, will not pass on the DDT tax savings to the shareholders. Consider this, retail investors hold a small number of shares, whereas the promoters/founders hold a much more significant portion. Hence, the company would surely not want to affect the promoters this way. Even if they do it, it would result in them using that money to either invest in the expansion of the company or for debt repayment or even consider buyback of shares. In the event of either, it would be beneficial to the shareholders.

Confusion Around Personal Income Tax

The next on the debate list has been the personal income tax structure. I’ve heard a lot about how the government has created more confusions than before on which structure should one be going for. But, thinking deeper, the government had always stated that simplifying the tax structures would be one of the things on their agenda and this is the first step they seem to have taken in that direction.

Coming on to whether it is beneficial or not to the taxpayers, I give this move a big thumbs up, if you look at the larger picture. Or rather, I would say it will help Indian stock market investors in two major ways:

  1. In order to save tax, taxpayers were forced to invest in vehicles that would give them lesser returns. Now, by reducing the tax slabs and removing the exemptions provided, taxpayers get the liberty to save & invest according to their personal preferences. Also, this step would give tax payers a slightly bigger share of in hand income and in turn promote more consumption/expenditure at their end too.
  2. Also, a simplified tax structure will always prompt faster increase in the number of tax payers. For the current fiscal, personal income tax collection is expected to increase to the tune of around 18%. With a simplified tax structure, it is expected to ease tax payment for the newer tax payers that would get added in the years to come.

From a government perspective, they will be able to better manage the high rates of interest they are forced to pay on instruments like EPF or PPF.

Disinvestment Plan Or A Desperate Measure?

Moving ahead, disinvestment has been a big talking point. To boost revenue flows for the year and to reduce reliance on external debt, divestment targets have been increased from Rs. 65,000 crore to Rs. 2.1 lakh crore.

A large portion of this would come from stake sale in Life Insurance Corporation of India (LIC) and Industrial Development Bank of India (IDBI), reducing the chances for the government missing this target. There is no denying that listing of LIC would have a big bearing on sectorial fund allocations from domestic funds and FII’s, and thus on the trading multiples enjoyed by its peers. But this is a long pending move, with no or limited business implication on the competitors.

There are two other ways to look at it:

  1. By listing LIC on the Indian stock markets, it would make the company a lot more transparent and accountable. The total assets of LIC, that fall in the range of Rs. 35 lakh crore, would be more transparently and efficiently managed. Yes, as I said before, it would have some negative impact on other insurance players, but it would also lead to better competition in the market and provide better products to the end consumer.

  2. With the listing of LIC on the Indian stock markets, the government is looking to raise funds close to Rs. 1-1.25 lakh crore during the next fiscal. If the government is looking to raise such a high amount, one basic factor it would have to ensure is that the overall sentiments around the economy tend to be in the positive to highly positive range.

Conclusion

In my humble opinion, I think the Finance Minister has done a commendable job with regards to not deviating from the target of the Indian economy reaching the $5 trillion mark.  And it is a proven fact that stock markets in India follow the trajectory of GDP.  So you can imagine the kind of wealth one can create by investing now in those stock market investment opportunities which will grow when India grows over the next 4-5 years.

By taking an extra burden of 0.5% on the fiscal deficit targets, the government has given impetus on growth as its primary goal. Along with this, by not reducing the spending on capital expenditure (infrastructure spending), it is a great step that the government has taken to showcase that overall growth and development continue to be its primary focus.

The FM has reiterated the government's commitment by mentioning 6,500 projects and spend of Rs. 103 lakh crore multiple times in her speech to boost infra growth in India.

The government has also continued its quest for reforms in the financial space by easing the personal income tax structure.

And last but not the least, if the government can pull off the disinvestment plans in a systematic manner, it would give a significant boost to the overall strength of the economy.

Saying all this, yes, you may find some misses as well that could have been addressed by FM. But, considering the steps taken, I feel the government has reiterated its commitment to making India a $5 trillion economy.

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