Summary:
- Introduction
- The Claps
- The Misses
- The Punches
- Our Verdict
Introduction
The Union Budget for 2023 has been presented by the government, with a focus on fiscal responsibility, investment allocation, and addressing tax arbitrage. Despite expectations for changes in the capital gains structure, the budget remains largely unchanged. The government has allocated a record-breaking Rs. 10 Trillion for investments, with a significant emphasis on the railway sector and green energy.
The Claps
- No Changes to Capital Gains Structure: The budget did not bring any changes to the Capital Gains structure, which was widely expected.
- Fiscal Prudence Ahead of Elections: The expenditure program continues to be calibrated, with the government choosing fiscal prudence ahead of elections in 2024.
- Fiscal Deficit Target: The government has reiterated its target of achieving a fiscal deficit of sub 4.5% by FY26, with 5.9% pencilled for FY24. This was well received by the bond market, with a 15 bps fall in 10-year yields.
- Focus on Investments: The budget has a massive focus on investments, with a record allocation of Rs. 10 trillion.
- Push towards Green Energy: The budget has a significant push towards green energy and Hydrogen, with an Rs. 350 Billion outlay.
- Responsible Revenue Expenditure: Revenue expenditure has been kept flat largely led by reductions in subsidies, a responsible move by the government.
- Boosting Private Consumption: The budget aims to boost private consumption via the relaxation of tax slabs under the new tax regime, particularly benefiting individuals with annual incomes under Rs. 9 Lacs.
- Taxation for the Super-Rich Class: The taxation for the super-rich class has been moderated from a peak rate of 42.75% to 39%.
- Focus on Small Saving Schemes: The budget has a focus on certain small saving schemes, with senior citizens' small savings scheme deposit limits now
The Misses
- A little bit of tinkering around with indirect taxes, particularly on precious metals but this was something which was widely accepted
- No significant changes in deductions allowed under the old tax regime – clearly indicate that the government is probably going to phase this out in the future
- No expansion in the PLI scheme
- Continued lack of focus on budgetary support towards education & healthcare
The Punches
- Tax exemption on maturity proceeds from insurance products (endowment policies) with an aggregate premium of Rs. 5 Lacs and above has been now removed – Insurance stocks have taken a bath since then with the combined market capitalization of listed stocks down between 10-20% post announcement
- TDS exemption for listed debentures/bonds on interest payments has been withdrawn – this is surprising given that RBI has been pushing for more retail participation in the bond markets!
- The tax arbitrage on Market Linked Debentures now stands finished as now they are subject to short-term capital gains applicable to debt instruments
- All income distributed by business trusts (REITs / INVITs) other than that classified as a dividend will now be taxed as per the income tax slabs of end unit holders – this makes such instruments unattractive in the short term, particularly for HNIs
- Maximum set off against capital gains of any kind on purchase of house property is now capped at Rs. 10 Crores
- Foreign remittances other than those for education or medical treatment purposes will now attract a flat 20% Tax Collection at Source without any threshold limit. This will impact investments under the LRS scheme, foreign travel (hotel bookings on Agoda for example) as well as those subscriptions for magazines, technical services etc where bills are raised by an entity outside of India (Eg. Subscription to Wall Street Journal)
Our Verdict
The budget in face of central elections in 2024 has surprisingly turned out to be a fiscally responsible one, with continued focus by the government on capital investments in Railways, Defense, Roads, and Ports and new initiatives such as Green Hydrogen and energy transition program.
Focus on infrastructure, capital goods, and manufacturing sectors for long-term wealth creation opportunities. On the other hand, the government is now clearly seen to be systematically plugging several tax arbitrages that were being enjoyed by the rich and affluent class and all of the measures will clearly benefit investments in the domestic equity and debt markets through tax-friendly vehicles such as mutual funds.
