Union Government does a balancing Act in the Budget

 Author – Sampath Reddy, Chief Investment Officer at Bajaj Allianz Life Insurance



Finance Minister Arun Jaitley has by and large done a balancing Act in the Union Budget 2015. While it created room for  better profitability for corporates with the proposal for reduction in corporate tax, the Budget announced higher infrastructure spend to rev up the ailing economy as well as plans for maintaining the fiscal deficit at acceptable levels.

There were a lot of expectations surrounding the budget from all the stakeholders, ranging from rural households to salaried class to retired citizens and corporate sector and investor community on the other hand. Expectations ranged from revision in tax slab upwards for the salaried class to how the government will rev up the economic slowdown while maintaining the fiscal discipline and addressing the worries on retrospective taxation for foreign investors.

The Revenue receipts are budgeted to grow lower at 1.4% over FY15 owing to higher allocation of States in central tax revenues (Increase of 55% over FY15). The government has budgeted for a total expenditure increase of only 6%, largely driven by capital spending, which is budgeted to increase by more than 25%. The FM has stated that the fiscal deficit will be maintained at 3.9% for FY16, slightly higher than expectation but lower than 4.1% estimated for FY15. The government net borrowings number has remained flat at Rs 4.6 lakh crore. The medium term target of achieving 3% fiscal deficit has been pushed to FY18.

The FM has also brought cheers to the foreign investors by deferring the implementation of General Anti Avoidance Rule (GAAR) by two years.

The biggest surprise came on the corporate taxation front. The Finance Minister announced reduction in the corporate tax rate from 30% currently to 25% starting from FY17 in a gradual manner over a four year period. Companies which are at full tax rate – such as banks, and multi-national companies among others – are going to see maximum benefit.

One of the key announcements was related to fungibility of FDI and FII in sectors which are under the automatic approval category such as Banks. The Finance minister has done away with the distinction between Foreign Portfolio Investment (FPI) and Foreign Direct Investments (FDI), which is likely to attract more capital flows from FIIs especially in the banking sector where companies have already hit the FPI ceiling

Key Changes with respect to taxation

  1. Basic Corporate Tax Rate to gradually go down from 30% currently to 25% over 4 years starting FY17.
  2. Service tax rate has been hiked to 14% from 12%
  3. Excise Duty on Cigarettes has been hiked by 16% on weighted average basis
  4. No revision in the tax slabs for individuals can be considered as a matter of slight disappointment for the salaried class

There was emphasis on clean energy and “Make in India” campaign with increased target of 1,75,000 MW under the Renewable Energy program by 2022.

We remain optimistic on the measures being undertaken by the government and would recommend policyholders to remain invested and pay their premiums regularly to benefit from the uptick in the fortunes of the domestic economy over the coming few years.

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