FM failed to impress street with Union Budget 2020 in result market shown biggest budget day down side movement in 10 years. The Union Budget 2020 fell short of expectations of giving the intended stimulus which could put the economy back on the high growth path. FM Nirmala Sitharaman presented Union Budget 2020 on February 1, it will not bring major reforms as LTCG and STT were not touched by the finance minister. FM Sitharaman introduced new slabs and reduced the tax rate for different slabs for an individual income of up to Rs 15 lac per annum, if a taxpayer opts for foregoing exemptions and deductions. This move is discouraging for saving which was happening under Insurance and mutual funds for tax planning, govt’s intention behind this is to attract new tax payers with simplified tax regime without exemption and deductions.
The Budget pegged the fiscal deficit to GDP ratio at 3.5% for FY2021, exactly as per our expectations, while the same for FY2020 was expected to be 3.8%. Govt Receipt of INR 19.32 Lac Crore and expenditure of 23.16 Lac Crore. Govt has projection of nominal GDP growth of 10% for FY 20-21. Govt kept divestment target of 2.1 Lac Crore in finscal and govt proposed divest in LIC via IPO.
This budget is purely promoting consumption, boost income of people to enhance purchasing power. Union budget has been around economic principle that when economy is fighting with recession govt promote spending over saving to boost purchasing power and increase demand, certainly it will make a difference but it will take some time. The big step to bring in dividend taxation in line with international practices by the withdrawal of the DDT is a step in the right direction and will be a big boost for foreign investors. Under the DDT regime, foreign investors would not get a tax credit for the DDT against the taxes to be paid in their home country, leading to double taxation. The increase in federal deposit insurance limit from 1 lac to 5 lac is likely to encourage flow of small ticket deposits into banks. However this higher limit could increase the insurance cost for banks. Corporate Bond FPI limits increased from 9% to 15% (Incremental Rs. 2.11 Lac Crore). Also opening up of specific Indian govt bonds limits for NRI. Sovereign wealth funds to not pay any tax on dividend/interest for their investment in infrastructure companies, for the infra sector sovereign funds are likely to see accentuated growth with special purpose vehicles being given complete tax exemptions.