Budget Analysis for investors by Pankaj Singhania, Founder of Lakewater Advisors
Given the Indian economy is in low phase in terms of numbers for quite a period of time, countrymen were expecting positive consideration in the Budget 2020.
But the expectations were not met and stock market flagged a red signal to Finance Minister – Nirmala Sitharaman’s Budget speech. BSE Sensex-30 index tanked more than 980 points on the same day.
The speech was devoid of changes that would be pleasing to an investor. There wasn’t any major reform that would trigger the economy or boost consumption to revive economic growth.
Here at Lakewater, we take the opportunity to decode the Budget 2020, with respect to investors (domestic and international) in Indian Equity and how it could have a direct impact on them.
Dividend Income, Taxable at Receiver’s End
Globally, companies aren’t liable to pay tax on dividend. India was the odd one out here. For which, foreign countries struggled to avail tax credit in their home countries.
Budget 2020 has aligned the companies on global level, by removing Dividend Distribution Tax (DDT) of 15% (plus surcharge and cess). It is estimated that due to this, government has forgone estimated annual revenue of INR 25,000 Crore.
Earlier, individual investors paid taxes if they received dividends in excess of INR 10 lakhs p.a. and no tax if dividends were received from mutual funds.
Nonetheless, from April 2020, after abolishment of DDT, dividend income (mutual funds and shares) shall be taxable in the hands of the receiver as per their tax slab. Further, TDS shall be applicable @10% if the dividend income is above INR 5,000 in a financial year.
Small taxpayers shall not be affected much as they shall pay tax at minimum slab rate. However, this would be a cause of concern to large retail investors.
- DDT abolished.
- Recipient of dividend shall be taxed. Higher tax for retail investors
- Lower incidence of tax for foreign entities
Respite for Depositors
After 27 years, Deposit Insurance and Credit Guarantee Corporation (DICGC) – a wholly owned subsidiary of RBI that provides insurance cover to deposits in all commercial banks including local area, payments, small finance, regional rural and co-operative banks – have been granted to increase the protection cover for depositors.
While there was news regarding doubling the cover on bank deposits, the bold move from regarding raising the same to 5 lakhs came as a surprise to all. Which means, each depositor is now entitled for an insurance up to 5 lakh including interest.
This was due for long time and it gained momentum after Punjab and Maharashtra Co-operative bank collapsed and came under the directions of RBI. The increase in cover should monitor health of scheduled commercial banks.
- Relief to bank depositors as the insurance coverage hiked to INR 5 lakh.
- Revival of trust on small banks.
Long Term Capital Gain Missed
Mutual fund managers and investors were expecting the government to re-introduce LTCG tax. The market was expecting either removal of LTCG tax or extension of holding period to qualify for same, to boost market sentiment. However, this remains completely untouched as of now.
- Long term Capital Tax remains untouched.
Impact on Non-Resident Indians
The taxation structure of stateless people (someone who is “not considered as a national by any state under the operation of its law”) has been a matter of concern for quite some time. There is a probability that an individual can organize his affairs in such a fashion that he/she shall not be taxable under any jurisdiction.
This has been in practice among high net worth investors to evade tax. However, as per new regulations, even if the NRIs have not stayed in India for a long duration, shall still be liable for tax, if they are not liable for taxation under any other country, provided the income is derived from Indian business/profession.
There is no intention to tax income that bonafide workers earn overseas. The amendment is only for those who abuse the taxation norms.
In addition to that, the terms to qualify as an NRI have been changed. Budget 2020 proposes that only those people shall qualify as NRI, whose stay in India is less than 120 days, instead of 183 days.
- NRIs shall be taxable, if they aren’t taxable under any other country’s tax jurisdiction.
All in all, just like many other sections of the society, the budget has left the investors unsatisfied. Apart from hike in cover, there was no stimulus for equity and commodity market to raise market sentiments.