Budget 2016: A transformational budget for the country
Written on Tuesday, March 1, 2016
By Rajiv Bajaj - VC & MD Bajaj Capital Group
The Union Budget 2016 has been a transformational budget for the country. The substantial hike in the expenditure on social, farm, rural and infrastructure sectors of the economy in the current context where nominal growth is slowing and global headwinds are strong, and that too while meeting the 3.5% target for fiscal deficit in 2016-17, is exemplary and commendable. Respected Finance Minister has done a great balancing act in meeting the aspirations of the weaker sections of the society and building a strong infrastructure platform to catapult the economy on a sustainable high growth path in 2-3 years.
Markets were rife with rumours that tax exemption on Long Term Capital Gains in equities shall be revoked and Service Tax rate shall be hiked. The fact that none of these happened is one of the biggest positives. The amnesty scheme for people to declare undisclosed income by paying 45% tax accompanied with immunity from scrutiny and prosecution is another big positive. Historically amnesty schemes have brought in tax revenues to the tune of 0.2% to 0.8% of GDP.
Probably the biggest positive has been the reduction in the net borrowing program from Rs. 4.8 lakh crores in FY16 to Rs. 4.25 lakh crores in FY17. This has provided big relief to bond markets and the impact was also seen on banking stocks and equity markets as a whole. Bank treasuries can now hope to be in profits in this quarter while markets start building hopes of a surprise rate cut from RBI.
As the saying goes, there cannot be any gain without pain. Somebody has to foot the bill of higher spend on rural economy and infrastructure. The 10% tax on dividend for individuals getting dividend exceeding Rs. 10 lakhs per annum and the hike from 12% to 15%, in surcharge for people with taxable income greater than Rs. 1 crore, reflect this pain. From a national development point of view however, all of us in higher tax brackets will have to shoulder the responsibility in nation building. We should look at the bigger picture as citizens of the country. For Mutual Fund Investors, they should switch their holdings from Dividend to Growth Option to avoid this additional tax.
The move to make 40% of the lump sum withdrawals from NPS tax free was much needed. Any withdrawal from NPS, upon death, remains fully exempt from tax.
While my own pocket hurts the provision to tax withdrawals of more than 40% of the corpus from EPF and PPF is welcome as it now gives an even platform to NPS and puts the prerogative on citizens to plan their own social security. These were totally exempt from tax till now. One disappointment came in the form of introduction of too many types of cess. This goes against the government’s stated intent of simplifying the taxation process.
Investors will have a lot to look at in the coming year in the form of Rs. 46000cr of tax free bonds, lower premiums on single premium annuity life insurance policies and on general insurance policies, consequent to reduction in / exemption from Service Tax. The listing of general insurance companies should also provide an opportunity to investors to participate in this fast growing sector of the economy.
Overall, it is a reformist budget that comes as a pleasant surprise in the back drop of low expectations amid various fiscal and other constraints. We take it as another step towards realizing the true long term potential of the world’s fastest growing economy. I would take heart from this Budget and look at topping my Equity SIP Investments.