Our CIO, Mr. Sampath Reddy’s comments on Union Budget 2018
Overall, the Budget was a balanced one, with a focus on rural and agricultural sector.
The revised estimate of fiscal deficit for the FY18 is at 3.5% of GDP from 3.2% budgeted earlier, which is inline, however the fiscal deficit target for FY19 at 3.3% is a bit on the higher side, vis a vis market expectations of around 3.0% to 3.2%. This has been done with the Government wanting to push growth and budgetary allocation in rural and agricultural sectors for employment generation. Bond yields have already reacted to this higher than expected fiscal deficit.
It was widely expected that the Government would announce some reduction in corporate tax rate for larger corporates. While the finance minister has cut the corporate tax rate for smaller companies with annual turnover up to Rs.50 crore to 25% in the last year’s budget, the same has now been extended to the companies with turnover of up to 250cr. This is going to help the SME and MSME sector, but the large listed companies may not see any benefit of lower tax rate this year. This is a bit disappointment for the equity market as majority of the large companies do not get benefit.
As widely feared, the Government has proposed a 10% tax on Long-term Capital Gains (LTCG) greater than Rs 1 lakh for equities and equity-oriented funds, while the short term capital gains tax rate of 15% is retained on holdings up to 1 year. However, government has provided grand-fathering clause to protect the gains accrued so far, but the future gains and investment in equities will attract both long term and short term capital gains tax. This is a bit of a dampener for the equity markets, however the 10% long term tax and 15% short term tax is still relatively attractive.
The policyholders of life insurance companies will continue to enjoy the same tax regime as earlier, given that ULIP investors are holding for a minimum of five years.