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This budget i.e., the Union Budget of 2017 has many firsts to its credit. Firstly, the budget has been presented on the 1st of February contrary to its previous tradition of presenting it on the last working day of February. Secondly, the Railway Budget which used to be previously presented separately has been merged with the General Budget from this year on. However, the functional autonomy of the Railways will continue. Thirdly, the classification of expenditure into plan and non-plan has been eliminated thereby facilitating optimum allocation of resources.
Just like how you are given a budget within which you are asked to spend and manage your finances, similarly the government too has to prepare and give an estimate of its finance for the fiscal year that runs from 1st April – 31st March.
Let’s take a look into the impact of the Budget on Investments, Business and Stock Markets :
Majority of the budget allocations have gone towards investment with the rise in the government capital expenditure by 25.4%.
Capital Expenditure is the money used to purchase, upgrade or extend the life of long-term assets like property, infrastructure, machinery, etc.
Sector wise allocation of funds in Union Budget 2017:
Scheme wise allocation of funds in Union Budget 2017:
The Finance Minister proposed to do away with the Foreign Investment Promotion Board (FIPB). More than 90% of the total FDI inflows are now through the automatic route. FIPB was a national agency of the Government for a single window clearance for applications on FDI.
The entry of Foreign Direct Investment by non residents into India is regulated through two routes – automatic route and approval route. The automatic route is aimed for those sectors and levels of investment that are less restricted. On the other hand, in the case of approval route, government agencies regulate and scrutinises foreign investment while approving it.
Under the Automatic Route, the foreign investor of the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. The approval route FDI is allowable in all sectors and activities specified under the consolidated FDI policy.
Under the approval route or government route, the foreign investor or the Indian Company should obtain prior approval of the Government of India agencies or bodies specified.
The government’s focus on ease of doing business reflects in Budget 2017 too. India moved up one rank on the World Bank’s ease of doing business ranking last year.
Through consolidation, mergers and acquisitions, the Central Public Sector Enterprises (CPSEs) can be integrated across the value chain of an industry. It will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders.
The Government proposes to create an integrated public sector ‘oil major’ which will be able to match the performance of international and domestic private sector oil and gas companies.
CPSEs are those companies in which the direct holding of the Central Government or other CPSEs is 51% or more.
Foreign Portfolio Investor (FPI) Category I & II exempted from indirect transfer provision. Indirect transfer provision will not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India.
Foreign Direct Investment (FDI) and foreign portfolio investment are two of the most common routes for overseas investors to invest in an economy. FPI means investing by investors in financial assets such as stocks and bonds of entities located in another country.
Here are the examples of FDI & FPI explained by Investopedia:
Both the Sensex and the Nifty rose steadily as Jaitley’s speech progressed in the Lok Sabha, and registered gains of around 1 percent by the time he finished. Both indices seemed to show no signs of slowing their rise. The rupee too has appreciated to the dollar while the gold prices fell. According to IMF forecast, India is expected to be one of the fastest growing major economies in 2017.
The budget provided relief to the financial markets as it avoided tweaking of the long-term capital gains tax (LTCG) and securities transaction tax (STT) and clarifying several tax rules for foreign portfolio investors.
Capital gains tax: Any profit earned by selling a security asset is considered capital gain. At current rate, gains from transactions in shares held for less than 12 months are considered as short-term capital gains and are subject to a 15 per cent levy. Long-term capital gains on stocks and mutual funds are not taxed in India till now.
Securities transaction tax (STT): The securities transaction tax or STT is a turnover tax that an investor has to pay on the total consideration paid or received in a transaction in stock futures and options.
The shares of Railway PSEs like IRCTC, IRFC and IRCON will be listed in stock exchanges. According to the FM, Listing of Public Sector enterprises will foster greater public accountability and unlock the true value of these companies.
You can expect more CPSE Exchange Traded Funds (ETFs) in 2017. Against the backdrop of a successful listing of CPSE ETF this week, the finance minister said Exchange Traded Funds or ETFs are likely to remain preferred investment vehicle for divestment purpose.
Here is how Investopedia defines ETF.
CPSE ETF was first launched in March 2014 by Goldman Sachs Asset Management India. The second tranche was handled by Reliance Mutual Fund, which operates the ETF after it bought over Goldman’s mutual fund business in the country in 2015.
India’s tax to GDP ratio is very low, and the proportion of direct tax to indirect tax is not optimal from the view point of social justice. The FM after presenting the data to indicate that our direct tax collection is not commensurate with the income and consumption pattern of Indian economy, concluded that India largely is a tax non-compliant society. “The predominance of cash in the economy makes it possible for the people to evade their taxes. When too many people evade taxes, the burden of their share falls on those who are honest and compliant.” said the Finance Minister in his speech.
Through their tax proposal, the government aims to stimulate growth, provide relief to middle class, develop affordable housing, curbing black money, promote digital economy, and bring about transparency of political funding and simplification of tax administration.
The FM also proposed to make a number of changes in the capital gain taxation provisions in respect of land and building. The holding period for considering gain from immovable property to be long term is to be reduced from 3 years to 2 years.
This move will significantly reduce the capital gain tax liability while encouraging the mobility of assets. They also plan to extend the basket of financial instruments in which the capital gains can be invested without payment of tax.
Medium and Small Enterprises occupy bulk of economic activities and are also instrumental in providing maximum employment to people. However, since they do not get many exemptions, they end up paying more taxes as compared to large companies.
In order to make MSME companies more operational and also to encourage firms to migrate to company format, the Government proposed to reduce the income tax for smaller companies with annual turnover up to 50 crore to 25%, thereby making them more competitive.
The finance minister has proposed to slash the tax rate for individuals in the lowest income tax slab – Rs 2.5 lakh to Rs 5 lakh –to 5% instead of 10%.
The existing rebate under Section 87A (currently given to people with income up to Rs 5 lakh) is proposed to be reduced to Rs 2500 from the existing Rs 5000 for individuals earning between Rs 2.5 lakh to Rs 3.5 lakh.
As a result of the combined effect of the new Section 87A rebate and the reduction in the lowest slab tax rate to 5% the tax burden for those with income upto Rs 3 lakh would be zero and tax burden those in the Rs 3 lakh to Rs 3.5 lakh bracket would be Rs 2500.
The tax an Indian pays every year is calculated on the basis of his/her gross total income. The tax is calculated according to the income tax slabs announced by the government every year in the Budget.
The overall budget seems to be positive and will be successful if it is implemented properly and timely.