With the current economic growth rate sitting at a six-year low – a consequence of a prolonged trailing off of consumption – expectations from the upcoming Budget, to be unveiled by Finance Minister Nirmala Sitharaman on 1 February, is extremely high. Over the last few months, there has been some glimmer of hope with the markets enjoying a bounce, following the quick-fix measures implemented by FM Sitharaman, including the corporate tax rate cut, and the formulation of an alternative investment vehicle for the real-estate sector.
However, Budget 2020 will need to announce several new reforms if there is to be any hope of an economic revival over the next few quarters. With a swelling fiscal deficit, FM Sitharaman faces an unenviable challenge in implementing short-term measures, without sacrificing a long-term agenda.
The recent measures implemented by the Finance Ministry have, predominantly, been supply-side in nature, so it follows that the next step would be addressing the demand deficit. The previous finance minister, the late Arun Jaitley, had reinstated the long-term capital gains tax (LTCG) in the 2018 Budget, following a gap of 14 years. Under the current LTCG regime, gains on equity shares exceeding Rs 1 lakh are taxed at 10 per cent. Doing away with the LTCG tax, or increasing the holding periods for investment from just one year, would go some way towards inspiring confidence in investors, according to some experts.
The recent measures implemented by the Finance Ministry have, predominantly, been supply-side in nature, so it follows that the next step would be addressing the demand deficit. The previous finance minister, the late Arun Jaitley, had reinstated the long-term capital gains tax (LTCG) in the 2018 Budget, following a gap of 14 years. Under the current LTCG regime, gains on equity shares exceeding Rs 1 lakh are taxed at 10 per cent. Doing away with the LTCG tax, or increasing the holding periods for investment from just one year, would go some way towards inspiring confidence in investors, according to some experts.
Within the real-estate sector, prices continue to rise even in the face of sluggish demand. The government must address the root cause of the slump in this sector, perhaps through a restructuring of the current income tax regime. There have been rumours that it is considering changing the structure of the bottom-most slabs. Doing so, and putting more disposable income into the hands of people at the lower end of the economic ladder will certainly go some ways toward improving market sentiment. Moreover, while liquidity between banks remains high, banks themselves are currently suffering from a crisis of trust, leading to dire rates of lending. The government must introduce a new regulatory and compliance regime that addresses this trust deficit.
Finally, the abolition of the Dividend Distribution Tax has long been touted by several experts, and this Budget represents a great opportunity for the government to introduce a feel-good factor back into the investment arena. Some experts have stated that the DDT, being an additional tax on those company profits that are already taxed, is unfair, and should be rationalised. Current rates of DDT sit at 20 to 21 per cent, with an additional 10 per cent on those dividends exceeding Rs 10 lakh. Doing away with the DDT will certainly incentivise more individuals to enter the market directly, or via mutual funds.
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