Going by the market reaction Budget 2020 was a disaster. Let me start by saying it was not as bad as the market reaction. The market reaction was very sharp on two counts – a let-down on expectation build-up and in part because of the worsening situation on the Coronavirus from China. But there were some very good parts of the budget and some areas which could have been addressed and I hope they are addressed outside the budget as this Government has shown receptiveness to feedback and willingness to respond even beyond the budget.
Let’s start with the good parts first. I think the announcement of the income tax amnesty scheme where outstanding disputes can be settled before March 31, 2020, by paying the tax amount without any penalties or over-due interest is excellent. With this Government’s track record of chasing down defaulters and a healthy fear of the law built in the last few years, this scheme with over 4.83 lakh outstanding disputes is bound to be a success.
The efforts enunciated by the Finance Minister to increase participation in fixed income markets by raising FPI limits and moving to create G-Sec ETFs are appreciable. There are two other very significant moves to invite foreign capital – the tax holiday for investments by Sovereign Wealth Funds and specified foreign institutions into infrastructure projects before March 2024 is a great move considering the Rs 100 lakh crore infrastructure investment initiative across 6,500 projects. The move to abolish dividend distribution tax for foreign investors makes India an attractive destination at par with some of the global markets.
This is where the good fuses into what could have been better. The removal of dividend distribution tax is good for investors who ended up bearing the dividend distribution tax at 15% plus surcharge and cess despite not being required to pay that level of tax otherwise.
Where this gets a mixed response is that now there is nothing called a concessional rate of dividend tax because the dividend will be added to the income. It’s good to give relief to investors incurring a distribution tax but at the same time, the guys in charge of declaring dividends in case of the multitude of closely held companies have to incur a tax of close 43% on the dividend received! With already very high levels of personal income tax with a fresh classification as super-rich just last year, this is a bad move.
Mutual Funds, REITs, INVITs all dividends will be taxed at a marginal rate of tax – good for investors with low rates of tax incidence because they are spared distribution tax but increase tax outgo of affluent and high net worth investors dramatically. Nothing has changed in the economic or business prospects for us to immediately demand more; persistent moves to increase the tax burden of just one set of people over and over is a dampener.
Coming back to markets, it’s the let down on expectations which got this reaction. This is no normal year. The economy is at a cyclical trough, sectors like Real Estate and Auto, largest employment generators and two sectors with a maximum ripple effect on a multitude of ancillary sectors are in trouble.
The budget lacked any reference to the current scenario of these sectors. Given that the Government made all the right noises in the consultation process for this budget and there was huge amplification through media, setting expectations high and then letting everyone down was the unfortunate part.