Key Announcements in Union Budget 2019-20 and their Sectoral Impact

Finance Minister, Nirmala Sitharaman tabled Union Budget 2019-20 today. This is her first budget under Secord term of Modi Led NDA Government. The budget was a balanced one keeping in mind that it was an election year. Following are the key announcements made in the budget as well as its sectoral impact

Key Budget Highlights

Fiscal deficit lowered:

Government has revised its fiscal deficit target for the financial year to 3.3% against 3.4% in the interim Budget presented in February 2019. The government is hopeful of meeting the revenue target aided by higher tax revenue, ~Rs90,000cr dividend from RBI and PSBs in FY20E, and divestment target of Rs1.05lakh cr.

Bond yields fall on proposed foreign currency borrowing:

The bond yields dipped to 6.56% from previous close of 6.75% on announcement that the government will start raising a part of its gross borrowing programme in external markets in external currencies. Additionally, adherence to fiscal prudence also contributed to declining yield.

Equity markets not impressed:

The equity markets reacted negatively on taxation of buybacks at 20% (for listed entities); increasing minimum public shareholding by 10% to 35% (under-consideration); divestments in CPSEs. Additionally, higher tax rates of ~42.7% was not taken well by top income earners.

The Budget 2019 pegged the disinvestment target for the year at Rs1.05 lakh cr as against target of Rs90,000cr in the interim Budget (February 2019). This is expected to be facilitated through:

A. CPSE ETF to get similar benefits as ELSS

It is proposed that government will launch Central Public Sector Enterprises Exchange Traded Funds (CPSE ETF) in a tax saving mutual fund scheme format. Investments in equity linked savings scheme (ELSS) are given deduction under section 80C. Investors need to stay locked in for 3 years to avail the deduction benefit. Presently only mutual fund schemes used to fall under ELSS, now onwards for first time in India, ETF will come in an ELSS format.

B. Disinvestment in non-financial PSU while maintaining government’s stake

Government has been following the policy of disinvestment in non-financial public sector undertakings maintaining Government stake not to go below 51%. It is considering to go below 51% to an appropriate level on case to case basis where the undertaking is still to be retained in Government control. Considering holding of companies such as LIC in overall limits of minimum holding in PSU, it will help create space for reducing stake in some of the Public Sector Undertakings.

Proposal to consider increasing public shareholding

In the Budget, government has proposed to consider an increase in minimum public shareholding in listed companies from current 25% to 35%. Based on the latest shareholding data, out of the total listed companies (including government companies), there are 1,250 companies where promoters’ shareholding is more than 65%.

Digital payments get a big push

In the current budget, government has proposed a TDS of 2% on cash withdrawal on amount exceeding Rs1cr in a year from a bank account. This move is expected to discourage the practice of making business payments in cash. Business establishments with annual turnover more than Rs50cr shall offer low cost digital modes of payment (like Aadhaar Pay, NEFT, RTGS, BHIM, UPI, etc.) to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants.

National Pension Scheme (NPS)

In order to make NPS tax benefit in-line with Employee Provident Fund (EPF) and Public Provident Fund (PPF), government has proposed to increase the income tax exemption limit on withdrawal from NPS to 60% from 40%. Both EPF and PPF presently fall under "EEE" regime, i.e. nil tax on contribution, accrual and withdrawal.

  Additional deduction allowed on affordable housing

To push PMAY scheme, government has proposed to allow an additional deduction of up to Rs1.5 lakhs for interest paid under ‘Housing for All’ scheme, provided loan amount is maximum Rs45 lakhs and it is borrowed up to March 31, 2020. This deduction will be over and above the deduction of ?2 lakh allowed on a home loan interest payment under section 24(b) of the Income Tax Act, 1962.

Annual turnover limit increased in the lowest corporate tax slab

Government has proposed 25% corporate tax rate on all companies with an annual turnover of up to Rs400cr (earlier Rs250cr). As per finance ministry, this move may cost the government Rs4,000cr loss.

No change in personal tax slabs but cess increased on the super rich

The current budget didn't alter income tax slabs but increased surcharge on super rich. It is increased from current rate of 15% to 25% on the income slab falling under Rs2-5cr, and from current 15% to 37% on income falling above Rs5cr.

Custom Duty Changes