Budget 2018 will be unique in more ways than one. This will be the last full budget presented by the current government and Finance Minister Arun Jaitley as the 2019 budget is likely to be a vote-on-account. This will also be the first budget after the launch of GST. Above all, GST also means that a plethora of indirect taxes like excise duty, service tax, VAT and central sales tax will be subsumed into the GST umbrella. That means the two major areas that the budget will gravitate towards will be direct taxation and equity markets; at least from an investor’s point of view.
What will be the leitmotif of Budget 2018?
The Union Budget 2018 will be based on the 5 broad themes of easing tax burden on the middle class, focus on rural incomes, navigating fiscal deficit overflow into productive channels, carving a bigger role for fiscal policy and taking digitization to its next logical level. Within these 5 themes, the government will have 2 delicate balancing acts. Firstly, it will have to tax the rich a little more and yet entice them to invest more aggressively in the India story. Secondly, the Union Budget will have to spur rural and urban consumption without fanning CPI inflation, which is already at 5.21%. That is sure to be a tightrope walk for Finance Minister Arun Jaitley.
Watch video: Budget 2018: FM Arun Jaitley may tweak Income Tax Exemption limit
The big story – Will the government bite the bullet on corporate tax cuts?
Over the last few years there has been a clamour to cut the corporate tax to more competitive levels. Currently, mid and large domestic corporates are taxed at 30%, but adding the surcharge and the cess takes it to 34.6%. There has been a demand to cut corporate tax rates from 30% to 25%, largely on the lines of what Trump is attempting aggressively in the US. This sharp cut in corporate taxes is likely to spur corporate spending and also catalyze the revival of the capital investment cycle. That is perhaps the biggest bet in the Budget 2018 and could have deep implications for the equity markets and for the tax revenues of the government.
What will the budget mean for your investment mix?
For the equity markets, the good news is that the tone of the Union Budget may gravitate towards equities. We do see a cut in rates of return on small savings. Also, the budget may hint at an end to the rate cut cycle and that is not great news for long dated debt and G-Sec funds. Equities could be the logical beneficiary from the Budget 2018 in a number of ways. Firstly, the definition of ELSS may be expanded to include direct equities too. Secondly, Section 54EC benefit is currently restricted only to reinvestment in specific bonds issued by NHAI, IREDA, IRFC, REC etc. The budget may look to extend these benefits to infrastructure funds and infrastructure stocks too. In a nutshell, the upcoming Union Budget could be a word of caution on debt and a leg-up for equities.
Watch video: FM Jaitley can reduce Corporate Tax to 25%
What does Budget 2018 mean for equity market performance?
The Union Budget 2018 is likely to be predicated on 2 broad themes. On the one hand, the government will be looking to give a boost to the rural sector with greater outlays on rural infrastructure and rural employment programs. The outcome will be increased rural demand. This higher rural purchasing power could translate into greater demand for fertilizers, agrochemicals, drip irrigations systems, hybrid seeds etc. All these sub-sectors could stand to benefit. On the other hand, the government is endeavouring to put more money in the hands of people with a grater propensity to consume. That could trigger off a virtuous consumption cycle. Sectors like FMCG, consumer durables, financial services could be direct beneficiaries of this trend.
No Robin Hood syndrome, but the wealthy will be taxed a little harder…
The tax structure is likely to be tweaked to put more money in the hands of the middle income groups and making the higher income groups pay a little more. So, while dividend distribution tax could be scrapped due to its uniform impact, the tax on dividends above Rs 1 million will stay and may even be increased. The number of slabs for the middle income groups may be increased to reduce the tax burden but the higher income groups may end up paying a higher surcharge. Specific Income Tax sections like Section 80C and Section 24 may see a higher limit to reduce the tax burden on the middle income groups. STT, which generates over Rs.8000 crore annually, is likely to stay while LTCG is unlikely to be taxed for now!
The one message that has emerged clearly from the WEF in Davos is that the world is excited about the India story. India surely is an idea whose time has come and Davos is an affirmation. How this translates into growth and wealth creation will depend largely on how the government handles the economy in the next few years. The Union Budget 2018 could just about be the starting point!
(By Vaibhav Agrawal, Head of Research & ARQ, Angel Broking)