Expectations from Budget 2018

Thursday, January 18, 2018 Vaibhav Shah 0 Comments







It’s all about Politics…

The recently concluded Gujarat elections undoubtedly has implications for the ruling Bharatiya Janata Party (BJP). Though the BJP secured a clear majority in the elections, the fact remains that despite crossing the half-way mark, BJP won fewer seats than the 2012 elections. A close look at the results indicated that BJP lost seats in rural Gujarat especially in places where there is strong Patidar (Patel) presence. The political strategists of the BJP are likely to accept the reality of Gujarat elections, particularly in the run up towards the many state assembly elections in 2018 and the major 2019 General Elections.

The government is likely to change the narrative going forward and will surely use the upcoming budget, the last full budget of the ruling party under the leadership of PM Modi, to sow the seeds. We believe the budget will be populist with more socialist measures; especially for farmers and rural classes. However Finance Minister Jaitley will have to balance this short term view by compromising on longer term objectives, given the fiscal constraints the country faces.

If we go by the past track record of the government, the focus has been primarily on long term reforms and some of the key ones such as Goods and Services Tax (GST), Real Estate Regulatory Authority (RERA), Bankruptcy law, Aadhar Bill etc. have been pushed through over the past three years.

But this time around, the budget will focus on subsidy policies in sectors like housing, agriculture and micro, small & medium enterprises sector that boost growth and employment; and on immediate job-creating sectors like textile, leather, gems & jewellery etc. There will also be focus on making the core vote bank of the BJP happy, i.e. the salaried middle class and the MSME traders who have been impacted by Demonetization and GST, and are demanding for some relief from the government.

On the tax front, the finance minister has done quite a bit on the indirect tax part with GST implementation but he will surely try to bring in petroleum products in the GST net. Also, it is expected that the government could restructure personal income tax slab or may increase the exemption under section 80C with an aim to bring some relief to the individuals particularly the salaried class, the biggest vote bank for the BJP. We at ORO believe that individuals belonging to the middle class can hope for some relief as the government may raise personal tax exemption limit and tweak the tax slabs.


From an investor’s point of view…

From an investments or investor’s perspective, other benefits which the finance minister (FM) may announce in the upcoming budget could be:

·         Increase in Section 80C Limit - From the current limit of Rs 1.5 Lakh per year to Rs 2 Lakh per year. The govt. realizes that this is an excellent way to channelize an individual’s savings towards investment objectives. The exemption limit was last raised in the 2014-15 from Rs 1 lakh a year to Rs 1.5 lakh. This will be a step that will be wholeheartedly appreciated by individual taxpayers. The increase in 80 C limit can either be in the form of a blanket increase or may just be restricted to few tax-saving products like ELSS or Insurance.

·         Incentive for first time home buyers - Section 80EE of the Income Tax Act currently provides exemption to the tune of Rs 50,000 for first time home buyers whose loan was sanctioned in fiscal 2017. We believe this benefit could be extended for a period beyond fiscal 2018. Additionally, we expect the pre-requisites to be relaxed to some extent such as removal of the clause requiring the property value to be lesser than Rs.50 lakhs, removal of size and location of property requirements etc.

·         Increase in limit for National Pension Scheme (NPS)
Under Section 80CCD (1) of the Income Tax Act provides for a cap on the tax deduction that a self-employed individual can claim. The government may increase the limit under Section 80CCE as it could encourage self-employed taxpayers to explore NPS as a tax saving instrument.

·         Retaining long-term capital gain tax on equity investments 
Speculation is doing rounds around the withdrawal of tax-free status of long-term capital gains from equities. We believe given India has low penetration of equity and equity related investments; the government could retain the tax-benefits over the long-term capital gains on equities. We believe this will continue to encourage investors to explore equity as an investment instrument and move away from traditional investment instruments such as gold, real estate and/or fixed deposits. However, Securities Transaction Tax levied on trading in equity instruments may increase though.

·         Including low-risk funds under Section 80C
Risk-averse investors typically invest in fixed deposits. They avail benefits under section 80C of the Income Tax Act by investing in tax saving deposits, PPF, NSC, other small savings etc. However, with rising inflation and reducing interest rates, investments in tax saving FDs are no more lucrative. Thus, including low-risk funds such as hybrid mutual funds or debt mutual funds maybe a good move. Including such funds will not only provide investors with better returns that FDs but will also have lower risk as compared to equity counterparts. Thus, we believe the government could extend the 80C tax exemption benefit to such categories with or without lock-in feature.

·         Enhancing limit and options for investment of capital gains under Section 54EC
The options for investment of long term capital gains for availing tax deduction under Section 54EC are limited to capital gain bonds issued by NHAI and REC or any other notified bonds. Inclusion of mutual funds into the basket of eligible investments with lock-in period of 3 to 5 years would channelize money from real estate back into capital markets. Further, the ceiling for investment could be enhanced from the present limit of Rs 50 Lakh to Rs 1 Crore, considering the spurt in property prices and the resulting capital gains.

The union budget will be tabled in the Parliament on February 1, 2018. It is expected that the government will leave no stone untouched to provide benefits to its new found focus of rural and agriculture sectors, along with their traditionally core constituency of salaried middle class and MSME traders/small businessmen, with an eye on 2019.




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