July 05, 2019

Table of Content Page No.

Key Highlights of Budget 2019-20 3

Budget impact on Buy Back – tax imposed 4

Divestment target increased to `1.05 lakh cr 5

Other Highlights in the Budget 6-8

Aiming at making India an attractive FDI destination 9

Outlay on Major Schemes 10

Snapshot of Budgets 11

Custom Duty Changes 12

Sectoral impact 13-16

Key Highlights of Budget 2019-20

 For full Budget 2019-20, the silver lining was government’s overseas borrowings plan,
reduction in fiscal deficit target and recapitalization of PSU banks. Fiscal prudence was taken
well by the bond market. The equity markets however, were unimpressed on buybacks
(untaxed before, being now taxable) and lack of sops for the hurting sectors. Most of the
allocations have come down or the growth rates have come off, which suggests that the
government has taken specific approach towards spending. We expect the earnings
recovery to be led by banking sector, while lower crude prices and favourable monetary
policy should kick start the capex cycle.
 Fiscal deficit lowered: Government has revised its fiscal deficit target for the financial year to
3.3% against 3.4% in the interim Budget presented earlier this year. The government is
hopeful of meeting the revenue target aided by (a) higher tax revenue, (b) ~`90,000cr
dividend from RBI and PSBs in FY20E, and (c) divestment target of `1.05lakh cr.
 Bond yields dive on proposed foreign currency borrowing: The bond yields dipped to as low
as 6.56% from previous close of 6.75% on announcement that the government will start
raising a part of its gross borrowing programme in external markets in external currencies.
Additionally, adherence to fiscal prudence also contributed to declining yield.
 Equity markets unimpressed: The equity markets reacted negatively on (1) taxation of
buybacks at 20% (for listed entities); (2) increasing minimum public shareholding by 10% to
35% (under-consideration); (3) divestments in CPSEs (taking away liquidity from the markets).
Additionally, higher tax rates of ~42.7% was not taken well by top income earners.

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Budget impact on Buy Back – tax imposed

 In order to dissuade the action of avoiding Dividend Distribution Tax (DDT) through buyback of
shares by listed companies, it is brought forward to provide that listed companies shall also be
liable to pay additional tax at 20% in case of buyback of shares, as is the case currently for
unlisted companies.
 DDT is paid by companies who decide to distribute their profits to their shareholders by way
of dividend. Currently, DDT is taxed at the rate 15%, but after surcharge and cess, effective tax
rate comes near about 20%.
 In the current budget, it is decided that listed companies shall also be liable to pay additional
tax at 20% in case of buyback of shares, as is the case currently for unlisted companies. Hence,
the proposed tax on share buyback is negative prima facie.
 Currently, lot of companies especially high payout companies such as Wipro had shifted to
buyback than to pay a dividend. Now, with the change in taxation on buyback, these
companies will consider twice before opting for buyback route.
 IT companies in India have bought back US$13bn of equity since FY16, over and above
US$16bn of dividends, paying out 76% of profits with an average annual yield of 3.7%.

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Divestment target increased to `1.05 lakh cr

 The Budget 2019 pegged the disinvestment target for the year at `1.05 lakh cr as against
target of `90,000cr in the interim Budget (February 2019). This is expected to be facilitated
through:
A. CPSE ETF to get similar benefits as ELSS
 It is proposed that government will launch Central Public Sector Enterprises Exchange Traded
Funds (CPSE ETF) in a tax saving mutual fund scheme format.
 Investments in equity linked savings scheme (ELSS) are given deduction under section 80C.
Investors need to stay locked in for 3 years to avail the deduction benefit. Presently only
mutual fund schemes used to fall under ELSS, now onwards for first time in India, ETF will
come in an ELSS format.
 The CPSE ETF is a mode by the government of India to divest its shareholding in select state-
owned companies.
B. Disinvestment in non-financial PSU while maintaining government’s stake
 Government has been following the policy of disinvestment in non-financial public sector
undertakings maintaining Government stake not to go below 51%. It is considering to go
below 51% to an appropriate level on case to case basis where the undertaking is still to be
retained in Government control.
 Considering holding of companies such as LIC in overall limits of minimum holding in PSU, it
will help create space for reducing stake in some of the Public Sector Undertakings.

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Other Highlights in the Budget

Proposal to consider increasing public shareholding

 In the Budget, government has proposed to consider an increase in minimum public
shareholding in listed companies from current 25% to 35%.
 Based on the latest shareholding data, out of the total listed companies (including government
companies), there are 1,250 companies where promoters’ shareholding is more than 65%.
 As per our calculation, these companies will have to off-load shares worth `3.9 lakh cr.
 This will include giants like TCS, Wipro, Avenue Supermart, HDFC Life Insurance.

Digital payments get a big push

 In the current budget, government has proposed a TDS of 2% on cash withdrawal on amount
exceeding `1cr in a year from a bank account. This move is expected to discourage the
practice of making business payments in cash.
 Business establishments with annual turnover more than `50cr shall offer low cost digital
modes of payment (like Aadhaar Pay, NEFT, RTGS, BHIM, UPI, etc.) to their customers and no
charges or Merchant Discount Rate shall be imposed on customers as well as merchants.
 It is proposed to start implementation of faceless scrutiny assessments (i.e. without human
interface and not disclosing specifics of assessing officer). This will help in reducing time and
increasing fair trail.

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Other Highlights in the Budget

National Pension Scheme (NPS)

 In order to make NPS tax benefit in-line with Employee Provident Fund (EPF) and Public
Provident Fund (PPF), government has proposed to increase the income tax exemption limit
on withdrawal from NPS to 60% from 40%. Both EPF and PPF presently fall under "EEE"
regime, i.e. nil tax on contribution, accrual and withdrawal.
 Prior to the proposal, 40% of the total accumulated corpus utilized for purchase of annuity
was already tax exempted. Moreover, of the rest 60% of the accumulated corpus withdrawn
by the NPS subscriber at the time of retirement, 40% was tax exempt and balance 20% was
taxable.

Additional deduction allowed on affordable housing

 To push PMAY scheme, government has proposed to allow an additional deduction of up to
`1.5 lakhs for interest paid under ‘Housing for All’ scheme, provided loan amount is maximum
`45 lakhs and it is borrowed up to March 31, 2020.
 It is noted that the deduction will be over and above the deduction of ₹2 lakh allowed on a
home loan interest payment under section 24(b) of the Income Tax Act, 1962.
 The new additional deduction will benefit home buyers in tier 2 and 3 cities more compared
to metro cities as the real estate prices are higher in metros.

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Other Highlights in the Budget

Annual turnover limit increased in the lowest corporate tax slab

 Government has proposed 25% corporate tax rate on all companies with an annual turnover
of up to `400cr (earlier `250cr). As per finance ministry, this move may cost the government
`4,000cr loss.

No change in personal tax slabs but cess increased on the super rich
 The current budget didn't alter income tax slabs but increased surcharge on super rich.
 It is increased from current rate of 15% to 25% on the income slab falling under `2-5cr, and
from current 15% to 37% on income falling above `5cr. Effectively, there will be an increase in
the current tax rates for such individuals from 35.9% to 39% and 42.7% respectively.

Removal of Taxing anomaly

 On exercising of options, STT to be levied on the difference of settlement and strike price vs.
settlement price earlier. It will lead to correction in tax anomaly.

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Aiming at making India an attractive FDI destination

 India’s FDI inflows remained strong at US$ 64.4bn, a 6% growth over the previous year. In
order to further consolidate the gains and make India a more attractive FDI destination, the
government has proposed:

a) Examining suggestions of further opening up of FDI in aviation, media and insurance sectors
in consultation with all stakeholders.
b) 100% Foreign Direct Investment (FDI) permitted for insurance intermediaries.
c) Ease in local sourcing norms for FDI in Single Brand Retail sector.

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Outlay on Major Schemes

2019-20 2019-20 Difference

2018-19 YoY
(`cr) (`cr) from Interim
Scheme (`cr) Revised Change
InterimBudget Budget (` cr)
Estimates (%)
Estimates Estimates
Mahatma Gandhi National Rural
Employment Guarantee Program 61,084 60,000 60,000 - (1.8)
(MNEREGA)
National Education Mission 32,334 38,572 38,547 (25) 19.2

National Health Mission 31,187 32,251 33,651 1,400 7.9

Pradhan Mantri Awas Yojna (PMAY) 26,405 25,853 25,853 (0) (2.1)

Pradhan Mantri Gram Sadak Yojna 15,500 19,000 19,000 - 22.6

Income Support Scheme (PMKISAN) 20,000 75,000 75,000 - 275.0

Urea Subsidy 44,995 50,164 53,629 3,465 19.2

National Highways Authority of India 37,321 36,691 36,691 - (1.7)

Direct Benefit Transfer 16,478 29,500 29,500 - 79.0

Source: indiabudget.nic.in

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Snapshot of Budgets

2018-19 2019-20 2019-20

Difference
(`cr) (`cr) (`cr)
from Interim YoY change (%)
Revised Interim Budget Budget
(` cr)
Estimates Estimates Estimates

Revenue Receipts 17,29,682 19,77,693 19,62,761 (14,932) 13.5

Capital Receipts 93,155 1,02,508 1,19,828 17,320 28.6

Total Receipts 15,50,913 20,80,201 20,82,589 (5,29,287) 0.0

On Revenue
21,40,612 24,47,907 24,47,780 (127) 0.0
Account

On Capital Account 3,16,623 3,36,293 3,38,569 2,276 0.7

Total Expenditure 24,57,235 27,84,200 27,86,349 2,149 0.1

Fiscal Deficit 6,34,398 7,03,999 7,03,760 (239) 0.0

Fiscal Deficit (% of
3.4 3.4 3.3 -- --
GDP)
Source: indiabudget.nic.in

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Custom Duty Changes

Custom Duty From To Impact Beneficiary

Reliance Industries,
Positive
Finolex Industries
Poly Vinyl Chloride 7.5% 10.0%
Negative PVC Pipe manufacturers

Butyl rubber 5.0% 10.0% Negative Tyre Manufacturers

Ceramic floor tiles 10% 15% Positive Kajaria, Somany, etc

Optical Fiber cables and bundles 10% 15% Positive Sterlite Technologies
Chemical and Fertilizer
Naphtha 5% 4% Positive
companies
Negative GCPL, HUL, JLL
Palm stearin and other oils Nil 7.50%
Positive Godrej Agrovet
Air Condition Unit parts 10% 20% Negative Voltas & Blue Star
N R Agarwal, Shree Rama
Positive
Newsprint
Newsprint Nil 10.0%
Negative Print Media Companies

Gold 10% 12.50% Negative Jewelry Industry

Source: indiabudget.nic.in

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Sectoral Impact

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 Banking and NBFCs
Announcements Impact Stocks to be in focus
Public Sector Banks recapitalization proposed at `70,000cr
Positive All PSU banks
against the expectation of `50,000cr.
For purchase of high-rated pooled assets of financially
sound NBFCs, amounting to a total of `1 lakh cr during the Bajaj Finance, HDFC Ltd, M&M
current financial year. Government will provide one time six Positive Finance, Aavas Financiers and
months partial credit guarantee to Public Sector Banks for other sound NBFCs
first loss of up to 10%.
To allow FIIs and FPIs investment in debt securities issued
Positive All NBFCs
by NBFCs.
Regulation of Housing Finance Companies to move to RBI
Positive Housing Finance companies
from NHBs.
Requirement of Debenture Reservation Reserve to be done
Positive All NBFCs
away with for NBFCs.
Proposed additional deduction of Rs1.5 lakh on interest for
Housing Finance companies and
affordable homes valued upto Rs45 lakh borrowed up Positive
banks
to March 31, 2020.

Banking and NBFCs focusing on

Proposed setting up 1.95cr houses under Pradhan Mantari Positive
affordable housing
Awas Yojna (Rural).
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 Cigarettes
Announcements Impact Stocks to be in focus
Basic excise duty of 0.5paisa/stick levied on all segments
except Kings and 1paise/stick for Kings to result in Positive ITC
negligible increase in taxes. .

Oil and Gas

Announcements Impact Stocks to be in focus
Increased Special Additional Excise duty and Road and
Infrastructure Cess each by one rupee a litre on petrol and Neutral
diesel.
HPCL, BPCL and IOCL
Tax deduction on interest on auto loan for EV. Benefit will
Negative
be spread over years of interest payment.

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 Exchanges
Announcements Impact Stocks to be in focus

Corporate tax rate of companies with a turnover/revenues Positive IEX, MCX and CDSL
of Rs4bn or less in FY18 to be reduced from 30% to 25%

Auto
Announcements Impact Stocks to be in focus
Increase in customs duty on certain parts/vehicle imports:
The rise in import duty will result in higher input costs for
OEMs. However, the increase in duty is not very significant Negative Auto OEMs
at 2.5-5.0% (from 7.5% to 10%, from 10% to 15% and from
25% to 30%)

IT
Announcements Impact Stocks to be in focus
IT companies – Most cos. are
20% tax on buyback of share of listed companies Negative overcapitalized and reward
shareholders via buybacks

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