FM GIVES A MINI BUDGET – DIWALI COMES EARLY!

about 3 months ago
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Wow!!! Nirmala Sitharaman finally got it right!

After three rounds of stimulus which did not nothing for the market, looks like this Friday she finally found the nerve center and hit it right. The Sensex jumped up over 1500 points – single biggest gain in 10 years.

Given the fall in direct tax and GST collection, the FM probably realized that a high tax regime would in fact gut the economy, putting the BJP in serious jeopardy. The falling market was obviously the top priority in her mind and that’s what she corrected today. Foregoing revenue collection for the Govt, the FM got the markets to move up like a rocket! Well, it will mean taking a hit on the fiscal deficit but for now, this action is probably what was required.

You can call today’s announcement as “Mini Budget.” That’s what it seemed like. And she massaged those who were hurting and sulking the most – India Inc. Here is a quick look at the fiscal sops which she gave today:

  • Corporate tax rate at 25.17% v/s 29% now – this includes all surcharge and cesses
  • Option to pay 22% - if company does not avail any exemption or incentives.
  • This tax cut to be implemented through an ordinance.
  • Any new domestic company incorporated on or after Oct 1, 2019, will have a tax rate of 15%; no MAT.
  • No MAT for domestic companies; those opting to continue paying surcharge and cess, MAT reduced to 15% from 18.5%
  • No enhanced surcharge introduced in  budget 2019 on capital gains arising on sale of equities in the hands of individuals, HUFs, AOP, etc.
  • No surcharge on capital gains on sale of securities, including derivatives in hands of FPIs
  • Listed companies, opting for buyback to pay no tax – if buyback was announced before 5th July 2019.
  • 2% CSR fund can be spent on incubators funded by center or state govts or any agency or PSU or central/state govts as well as public funded universities such as IITs.
  • Total revenue loss on account of these fiscal sops – Rs.1.45 lakh crore.

Undoubtedly, this is one of the boldest and momentous fiscal decisions in recent times.  This one move will not change the tide completely but this move does indicate the intent – the Govt is right on top of the slowdown. Companies will most certainly benefit, putting more money in the hands of corporates, hopefully enabling them to invest more. This fiscal sop should boost private investment but more importantly, this was the best thing for improving the perception and sentiments.

The optimism which this mini Budget has brought in today is what matters the most – more than the actual sops. The pall of gloom and doom which shrouded the sentiments should lift now, something which nothing could lift. The market is today celebrating the attitude of the Govt and that is the biggest mood improver. Hopefully, this will sustain.

Yes, we are paying the price through revenue loss for the ex-chequer. But the question we should ask is if this move will fire up demand and change the consumption narrative. The expectation is that tax cuts for companies will result in them reducing product prices, which in turn will boost demand. But remember, companies have not passed on any GST benefit to the consumer but maybe after this tax cut, some price benefits will get passed on.

Indirect tax cut is what gets passed on immediately. Maybe next Friday could address this. And having said all this, people like you and me, who pay taxes, we cannot help but wonder why our tax rates cannot come down – why all direct benefits for India Inc. If tax rates are cut for individuals, won’t that directly propel demand? Next Friday?

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