Article

Key Announcements in Union Budget 2019-20 and their Sectoral Impact

07 Aug 2019 Nikta Bhoota

Finance Minister, Nirmala Sitharaman tabled Union Budget 2019-20 today. This is her first budget under Secord term of Modi Led NDA Government. The budget was a balanced one keeping in mind that it was an election year. Following are the key announcements made in the budget as well as its sectoral impact

Key Budget Highlights

Fiscal deficit lowered:

Government has revised its fiscal deficit target for the financial year to 3.3% against 3.4% in the interim Budget presented in February 2019. The government is hopeful of meeting the revenue target aided by higher tax revenue, ~Rs90,000cr dividend from RBI and PSBs in FY20E, and divestment target of Rs1.05lakh cr.

Bond yields fall on proposed foreign currency borrowing:

The bond yields dipped to 6.56% from previous close of 6.75% on announcement that the government will start raising a part of its gross borrowing programme in external markets in external currencies. Additionally, adherence to fiscal prudence also contributed to declining yield.

Equity markets not impressed:

The equity markets reacted negatively on taxation of buybacks at 20% (for listed entities); increasing minimum public shareholding by 10% to 35% (under-consideration); divestments in CPSEs. Additionally, higher tax rates of ~42.7% was not taken well by top income earners.

The Budget 2019 pegged the disinvestment target for the year at Rs1.05 lakh cr as against target of Rs90,000cr in the interim Budget (February 2019). This is expected to be facilitated through:

A. CPSE ETF to get similar benefits as ELSS

It is proposed that government will launch Central Public Sector Enterprises Exchange Traded Funds (CPSE ETF) in a tax saving mutual fund scheme format. Investments in equity linked savings scheme (ELSS) are given deduction under section 80C. Investors need to stay locked in for 3 years to avail the deduction benefit. Presently only mutual fund schemes used to fall under ELSS, now onwards for first time in India, ETF will come in an ELSS format.

B. Disinvestment in non-financial PSU while maintaining government’s stake

Government has been following the policy of disinvestment in non-financial public sector undertakings maintaining Government stake not to go below 51%. It is considering to go below 51% to an appropriate level on case to case basis where the undertaking is still to be retained in Government control. Considering holding of companies such as LIC in overall limits of minimum holding in PSU, it will help create space for reducing stake in some of the Public Sector Undertakings.

Proposal to consider increasing public shareholding

In the Budget, government has proposed to consider an increase in minimum public shareholding in listed companies from current 25% to 35%. Based on the latest shareholding data, out of the total listed companies (including government companies), there are 1,250 companies where promoters’ shareholding is more than 65%.

Digital payments get a big push

In the current budget, government has proposed a TDS of 2% on cash withdrawal on amount exceeding Rs1cr in a year from a bank account. This move is expected to discourage the practice of making business payments in cash. Business establishments with annual turnover more than Rs50cr shall offer low cost digital modes of payment (like Aadhaar Pay, NEFT, RTGS, BHIM, UPI, etc.) to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.

National Pension Scheme (NPS)

In order to make NPS tax benefit in-line with Employee Provident Fund (EPF) and Public Provident Fund (PPF), government has proposed to increase the income tax exemption limit on withdrawal from NPS to 60% from 40%. Both EPF and PPF presently fall under "EEE" regime, i.e. nil tax on contribution, accrual and withdrawal.

  Additional deduction allowed on affordable housing

To push PMAY scheme, government has proposed to allow an additional deduction of up to Rs1.5 lakhs for interest paid under ‘Housing for All’ scheme, provided loan amount is maximum Rs45 lakhs and it is borrowed up to March 31, 2020. This deduction will be over and above the deduction of ₹2 lakh allowed on a home loan interest payment under section 24(b) of the Income Tax Act, 1962.

Annual turnover limit increased in the lowest corporate tax slab

Government has proposed 25% corporate tax rate on all companies with an annual turnover of up to Rs400cr (earlier Rs250cr). As per finance ministry, this move may cost the government Rs4,000cr loss.

No change in personal tax slabs but cess increased on the super rich

The current budget didn't alter income tax slabs but increased surcharge on super rich. It is increased from current rate of 15% to 25% on the income slab falling under Rs2-5cr, and from current 15% to 37% on income falling above Rs5cr.

Custom Duty Changes

Custom Duty

From

To

Impact

Beneficiary

Poly Vinyl Chloride

7.5%

10.0%

Positive

Reliance Industries, Finolex Industries

Negative

PVC Pipe manufacturers

Butyl rubber

5.0%

10.0%

Negative

Tyre Manufacturers

Ceramic floor tiles

10%

15%

Positive

Kajaria, Somany, etc

Optical Fiber cables and bundles

10%

15%

Positive

Sterlite Technologies

Naphtha

5%

4%

Positive

Chemical and Fertilizer companies

Palm stearin and other oils

Nil

7.50%

Negative

GCPL, HUL, JLL

Positive

Godrej Agrovet

Air Condition Unit parts

10%

20%

Negative

Voltas & Blue Star

Newsprint

Nil

10.0%

Positive

N R Agarwal, Shree Rama Newsprint

Negative

Print Media Companies

Gold

10%

12.50%

Negative

Jewelry Industry

Source: indiabudget.nic.in

Sectoral Impact

Banking and NBFC

Banking and NBFCs

Announcements

Impact

Stocks to be in focus

Public Sector Banks recapitalization proposed at Rs70,000cr against the expectation of Rs50,000cr.

Positive

All PSU banks

For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs1 lakh cr during the current financial year. Government will provide one time six months partial credit guarantee to Public Sector Banks for first loss of up to 10%.

Positive

Bajaj Finance, HDFC Ltd, M&M Finance, Aavas Financiers and other sound NBFCs

To allow FIIs and FPIs investment in debt securities issued by NBFCs.

Positive

All NBFCs

Regulation of Housing Finance Companies to move to RBI from NHBs.

Positive

Housing Finance companies

Requirement of Debenture Reservation Reserve to be done away with for NBFCs.

Positive

All NBFCs

Proposed additional deduction of Rs1.5 lakh on interest for affordable homes valued upto Rs45 lakh borrowed up toMarch 31, 2020.

Positive

Housing Finance companies and banks

Proposed setting up 1.95cr houses under Pradhan Mantari Awas Yojna (Rural).

Positive

Banking and NBFCs focusing on affordable housing

Cigarettes

The Government has announced Basic excise duty of 0.5paisa/stick levied on all segments except Kings and 1paise/stick for Kings to result in negligible increase in taxes. This is positive for ITC.

Oil and Gas

The Government has increased Special Additional Excise duty and Road and Infrastructure Cess each by one rupee a litre on petrol and diesel. This will have neutral impact on HPCL, BPCL and IOCL.

IT

The Government has announced 20% tax on buyback of share of listed companies. This negative for IT companies – Most cos. are overcapitalized and reward shareholders via buybacks.

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Key Announcements in Union Budget 2019-20 and their Sectoral Impact

07 Aug 2019 Nikta Bhoota

Finance Minister, Nirmala Sitharaman tabled Union Budget 2019-20 today. This is her first budget under Secord term of Modi Led NDA Government. The budget was a balanced one keeping in mind that it was an election year. Following are the key announcements made in the budget as well as its sectoral impact

Key Budget Highlights

Fiscal deficit lowered:

Government has revised its fiscal deficit target for the financial year to 3.3% against 3.4% in the interim Budget presented in February 2019. The government is hopeful of meeting the revenue target aided by higher tax revenue, ~Rs90,000cr dividend from RBI and PSBs in FY20E, and divestment target of Rs1.05lakh cr.

Bond yields fall on proposed foreign currency borrowing:

The bond yields dipped to 6.56% from previous close of 6.75% on announcement that the government will start raising a part of its gross borrowing programme in external markets in external currencies. Additionally, adherence to fiscal prudence also contributed to declining yield.

Equity markets not impressed:

The equity markets reacted negatively on taxation of buybacks at 20% (for listed entities); increasing minimum public shareholding by 10% to 35% (under-consideration); divestments in CPSEs. Additionally, higher tax rates of ~42.7% was not taken well by top income earners.

The Budget 2019 pegged the disinvestment target for the year at Rs1.05 lakh cr as against target of Rs90,000cr in the interim Budget (February 2019). This is expected to be facilitated through:

A. CPSE ETF to get similar benefits as ELSS

It is proposed that government will launch Central Public Sector Enterprises Exchange Traded Funds (CPSE ETF) in a tax saving mutual fund scheme format. Investments in equity linked savings scheme (ELSS) are given deduction under section 80C. Investors need to stay locked in for 3 years to avail the deduction benefit. Presently only mutual fund schemes used to fall under ELSS, now onwards for first time in India, ETF will come in an ELSS format.

B. Disinvestment in non-financial PSU while maintaining government’s stake

Government has been following the policy of disinvestment in non-financial public sector undertakings maintaining Government stake not to go below 51%. It is considering to go below 51% to an appropriate level on case to case basis where the undertaking is still to be retained in Government control. Considering holding of companies such as LIC in overall limits of minimum holding in PSU, it will help create space for reducing stake in some of the Public Sector Undertakings.

Proposal to consider increasing public shareholding

In the Budget, government has proposed to consider an increase in minimum public shareholding in listed companies from current 25% to 35%. Based on the latest shareholding data, out of the total listed companies (including government companies), there are 1,250 companies where promoters’ shareholding is more than 65%.

Digital payments get a big push

In the current budget, government has proposed a TDS of 2% on cash withdrawal on amount exceeding Rs1cr in a year from a bank account. This move is expected to discourage the practice of making business payments in cash. Business establishments with annual turnover more than Rs50cr shall offer low cost digital modes of payment (like Aadhaar Pay, NEFT, RTGS, BHIM, UPI, etc.) to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.

National Pension Scheme (NPS)

In order to make NPS tax benefit in-line with Employee Provident Fund (EPF) and Public Provident Fund (PPF), government has proposed to increase the income tax exemption limit on withdrawal from NPS to 60% from 40%. Both EPF and PPF presently fall under "EEE" regime, i.e. nil tax on contribution, accrual and withdrawal.

  Additional deduction allowed on affordable housing

To push PMAY scheme, government has proposed to allow an additional deduction of up to Rs1.5 lakhs for interest paid under ‘Housing for All’ scheme, provided loan amount is maximum Rs45 lakhs and it is borrowed up to March 31, 2020. This deduction will be over and above the deduction of ₹2 lakh allowed on a home loan interest payment under section 24(b) of the Income Tax Act, 1962.

Annual turnover limit increased in the lowest corporate tax slab

Government has proposed 25% corporate tax rate on all companies with an annual turnover of up to Rs400cr (earlier Rs250cr). As per finance ministry, this move may cost the government Rs4,000cr loss.

No change in personal tax slabs but cess increased on the super rich

The current budget didn't alter income tax slabs but increased surcharge on super rich. It is increased from current rate of 15% to 25% on the income slab falling under Rs2-5cr, and from current 15% to 37% on income falling above Rs5cr.

Custom Duty Changes

Custom Duty

From

To

Impact

Beneficiary

Poly Vinyl Chloride

7.5%

10.0%

Positive

Reliance Industries, Finolex Industries

Negative

PVC Pipe manufacturers

Butyl rubber

5.0%

10.0%

Negative

Tyre Manufacturers

Ceramic floor tiles

10%

15%

Positive

Kajaria, Somany, etc

Optical Fiber cables and bundles

10%

15%

Positive

Sterlite Technologies

Naphtha

5%

4%

Positive

Chemical and Fertilizer companies

Palm stearin and other oils

Nil

7.50%

Negative

GCPL, HUL, JLL

Positive

Godrej Agrovet

Air Condition Unit parts

10%

20%

Negative

Voltas & Blue Star

Newsprint

Nil

10.0%

Positive

N R Agarwal, Shree Rama Newsprint

Negative

Print Media Companies

Gold

10%

12.50%

Negative

Jewelry Industry

Source: indiabudget.nic.in

Sectoral Impact

Banking and NBFC

Banking and NBFCs

Announcements

Impact

Stocks to be in focus

Public Sector Banks recapitalization proposed at Rs70,000cr against the expectation of Rs50,000cr.

Positive

All PSU banks

For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs1 lakh cr during the current financial year. Government will provide one time six months partial credit guarantee to Public Sector Banks for first loss of up to 10%.

Positive

Bajaj Finance, HDFC Ltd, M&M Finance, Aavas Financiers and other sound NBFCs

To allow FIIs and FPIs investment in debt securities issued by NBFCs.

Positive

All NBFCs

Regulation of Housing Finance Companies to move to RBI from NHBs.

Positive

Housing Finance companies

Requirement of Debenture Reservation Reserve to be done away with for NBFCs.

Positive

All NBFCs

Proposed additional deduction of Rs1.5 lakh on interest for affordable homes valued upto Rs45 lakh borrowed up toMarch 31, 2020.

Positive

Housing Finance companies and banks

Proposed setting up 1.95cr houses under Pradhan Mantari Awas Yojna (Rural).

Positive

Banking and NBFCs focusing on affordable housing

Cigarettes

The Government has announced Basic excise duty of 0.5paisa/stick levied on all segments except Kings and 1paise/stick for Kings to result in negligible increase in taxes. This is positive for ITC.

Oil and Gas

The Government has increased Special Additional Excise duty and Road and Infrastructure Cess each by one rupee a litre on petrol and diesel. This will have neutral impact on HPCL, BPCL and IOCL.

IT

The Government has announced 20% tax on buyback of share of listed companies. This negative for IT companies – Most cos. are overcapitalized and reward shareholders via buybacks.