Budget 2017 – Big reforms or mere statement of affairs – Realistic Assumptions
What are the changes?
- Instead of earlier tradition of presenting Union Budget on the last working day of February, Budget 2017 will now be presented on 1 February.
- There will not be any separate railway budget. It has been subsumed within the Union Budget
Why so much of importance?
World over, budget is the day when the ruling government presents the statement of affairs with key economic numbers such as Revenue (tax and non-tax revenue) and Expenditure (capital and revenue) and forecast the same for next 1 year based on the economic scenario.
However, India has a history of announcing various policy decisions on the day of budget – be it populist measures or big bang reforms. Ranging from tinkering with Individual’s tax rates, to some announcements regarding Foreign Investors, announcement regarding GAAR, everything forms part of the Union Budget. Hence, it assumes more significance in light demonetization, US Presidency with Mr. Trump and other world-wide issues.
As a layman, what we witnessed from last year’s budget (2016)?
- Excise duty was raised on certain products; 0.5 per cent Krishi Kalyan Cess to be levied on all services
- Pollution cess of 1 per cent on small petrol, LPG and CNG cars; 2.5 per cent on diesel cars of certain specifications; 4 per cent on higher-end models
- Dividend in excess of Rs. 10 lakh per annum to be taxed at additional 10 per cent
- Compliance window for declaring black money
- Additional exemption of Rs. 50,000 for housing loans up to Rs. 35 lakhs, provided cost of house is not above Rs. 50 lakhs
In nutshell, 2016 budget was not euphoric for middle class, upper middle class as well as rich. We saw cost of services and goods going up more than what the official inflation look like and what the Government claims. Though, indirect benefit would be there, because of the increased spending on the infrastructure, better railway facilities, better administration of government agencies (as many of them have gone online).
As a layman, what we expect from Union Budget 2017?
For 2017, our real expectation from the budget should be tapered, as this year too, government may not focus much on the middle class but rather focus on agriculture, populist measures for poor. The expectations from Union Budget 2017 are:
- Increase in basic exemption limit to Rs. 3 lakhs or Rs. 3.5 lakhs –> Benefit of Rs. 5,000/ Rs. 10,000 (more benefit for senior citizens, as limit may be raised to Rs. 5 lakhs)
- Home loan exemption may be increased to Rs. 2.50 lakhs –> Benefit for the people and supporting real estate sector
- Long Term Capital Gains on Shares/Mutual Funds will be increased to 3 years –> Though earlier investments be tax-free if held for more than 1 year. Hence, no immediate sell-off expected against what demonstrated on TV.
- Service tax increased to 16% –> Impact on our restaurant bills, hotels, telephone bills, rental etc.
- Scrapping on transaction charges for online transactions –> Government may bear 1-2% of the POS charges levied by the vendor/banks
- Corporate Tax Rate/ Highest Income Tax Rate reduced to 28% –> Benefit for the people who are running their businesses as corporate and high-net worth individuals
- Scrapping of various Indirect tax and Income-tax exemptions –> Government to phase out exemptions such as area based exemptions. It may make certain goods costlier such as cements.
- Cash Withdrawal Tax for Individual –> 0.1% tax on the cash withdrawal of Rs. 100,000 per month per individual
- Cash Withdrawal Tax for Businessman –> 0.1% tax on the cash withdrawal in excess of 1% of the turnover per month
Hence, this year’s budget for common man may be balanced (and no big gain), but being an Investment Manager, my comments would be incomplete without discussing the effect on your portfolio.
Effect of the Union Budget 2017 on your Portfolio?
Your equity portfolio would have seen significant improvement over past one month as index has gained more than 8% due to Global factors and budget expectations. Also, results of this quarter has not been that bad as it was previously thought as almost 60% of the companies (who reported their profits till now), have met or beaten the low level expectations.
- Wild fluctuations in select sectors due to removal of exemptions, and reduction of corporate tax rate. Overall, market may correct but for a limited time.
- Oil prices again at 55 USD/ barrel, Europe economy reviving, ISIS treat diminished, China’s growth stabilizing, US Rate Hike appears in order, stock market may find in sweet spot.
- More than Rs. 4,000 crore in SIPs helps stabilize the market fall and we all know the recent history of Brexit, Trump Vote, that market gained quickly post the historic decisions.
- Formalizing the cash economy through Cash Withdrawal Tax would make large companies’ earnings better
Plan your portfolio for next 5 – 7 years to take the next big opportunity in the Indian market as 134 crore public equipped with digital instruments to drive the consumption, data usage and evolve the new entrepreneurs and generate more and more employment. Doubling your portfolio may not be far away.
Views expressed above are personal opinion and do not confer investment advice. Please consult your financial advisor for prudent guidance and better investing.
Follow Tejas Lakhani, our Research Head.