ETMarkets.com, Jan 30, 2020
What to expect from Budget 2020: Tweaks in I-T rates, DDT & LTCG
Budget 2020 is just days away and speculation is rife on what Finance Minister Nirmala Sitharaman may have up her sleeves this Saturday.
Most analysts expect the FM to do some tweaking in personal income-tax rates, dividend distribution tax (DDT) and long-term capital gain (LTCG) tax, while a few others say an income-tax rate cut may not materialise this time around.
“Everyone is eyeing two things in this Budget: first, the fiscal deficit number and secondly, an overhaul of personal income-tax rates to trigger demand recovery,” said Amar Ambani, Senior President, YES Securities.
These measures, if announced, can boost consumption, especially in the semi-urban and rural areas. This will be a positive for volume growth of consumer staples, consumer durables, retail, low-ticket autos and other discretionary goods.
“The biggest challenge for the government today is to spur consumption, which has slowed down. The best way to do this is would be by leaving more money in the hands of end consumers,” said Hemang Kapasi, Portfolio Manager– Equity Investment Products, Sanctum Wealth Management.
He said taxpayers with income up to Rs 5 lakh today enjoy a rebate of Rs 12,500. The expectation is that this would be extended for taxpayers with income up to Rs 10 lakh. That will lower effective tax outgo for around 15 million individuals.
Also, it is highly anticipated that the government may revise the basic minimum exemption limit upward. The basic exemption limit of Rs 3 lakh has not changed since 2014-15.
The other big change expected in the Budget is removal of dividend distribution tax. At present, any dividend distributed by companies attracts an effective tax rate of 17.65 per cent. Further, shareholders receiving dividend above Rs 10 lakh a year are required to pay an additional 10 per cent tax.
“If this come about, this will lead to a significant re-rating of high dividend yield stocks, as there will not be any leakage in distributing high cash flows. A more efficient way of distributing dividends will also discourage companies from investing internal accruals in non-core businesses. Markets will take this positively,” said Kapasi There is also talk about a possible reduction in long-term capital gains tax, which was re-introduced in 2018. The government may not revoke it, but exempt it to securities held for more than two years. If this happens, markets will likely react positively.
“Any positive changes in LTCG and DDT would have a direct impact, leading to more inflows to the market. On the other hand, a reduction in personal income-tax rate or any such changes would lead to more disposable incomes, which will drive demand and consumption,” said Ajit Mishra, Vice President- Research, Religare Broking.
It is evident that the government is focusing on reviving the economic growth rate, which has been on a downslide. Recently, the International Monetary Fund (IMF) cut the India’s growth forecast for FY20. This creates additional pressure to make Budget 2020 a more comprehensive antidote for the ailing economy.
“We’re in the final phase of consolidation of the broader market. A gradual recovery in economic growth is expected now. Attractive earnings yield, lacklustre alternate asset classes, benign oil prices and a supportive global risk-on trade would be positives for equities. We see the possibility of Nifty hitting 13,000 mark in 2020,” said Ambani of YES Securities.