Budget 2020 decoded for investors

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Budget Analysis for investors by Pankaj Singhania, Founder of Lakewater Advisors

Given the Indian economy is in low phase in terms of numbers for
quite a period of time, countrymen were expecting positive consideration
in the Budget 2020.

But the expectations were not met and stock market flagged a red
signal to Finance Minister – Nirmala Sitharaman’s Budget speech. BSE
Sensex-30 index tanked more than 980 points on the same day.

The speech was devoid of changes that would be pleasing to an
investor. There wasn’t any major reform that would trigger the economy
or boost consumption to revive economic growth.

Here at Lakewater, we take the opportunity to decode the Budget 2020,
with respect to investors (domestic and international) in Indian Equity
and how it could have a direct impact on them.

Dividend Income, Taxable at Receiver’s End

Globally, companies aren’t liable to pay tax on dividend. India was
the odd one out here. For which, foreign countries struggled to avail
tax credit in their home countries.

Budget 2020 has aligned the companies on global level, by removing
Dividend Distribution Tax (DDT) of 15% (plus surcharge and cess). It is
estimated that due to this, government has forgone estimated annual
revenue of INR 25,000 Crore.

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Earlier, individual investors paid taxes if they received dividends
in excess of INR 10 lakhs p.a. and no tax if dividends were received
from mutual funds.

Nonetheless, from April 2020, after abolishment of DDT, dividend
income (mutual funds and shares) shall be taxable in the hands of the
receiver as per their tax slab. Further, TDS shall be applicable @10% if
the dividend income is above INR 5,000 in a financial year.

Small taxpayers shall not be affected much as they shall pay tax at
minimum slab rate. However, this would be a cause of concern to large
retail investors.

In Short:

  • DDT abolished.
  • Recipient of dividend shall be taxed. Higher tax for retail investors
  • Lower incidence of tax for foreign entities

Respite for Depositors

After 27 years, Deposit Insurance and Credit Guarantee Corporation
(DICGC) – a wholly owned subsidiary of RBI that provides insurance cover
to deposits in all commercial banks including local area, payments,
small finance, regional rural and co-operative banks – have been granted
to increase the protection cover for depositors.

While there was news regarding doubling the cover on bank deposits,
the bold move from regarding raising the same to 5 lakhs came as a
surprise to all. Which means, each depositor is now entitled for an
insurance up to 5 lakh including interest.

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This was due for long time and it gained momentum after Punjab and
Maharashtra Co-operative bank collapsed and came under the directions of
RBI. The increase in cover should monitor health of scheduled
commercial banks.

In Short:

  • Relief to bank depositors as the insurance coverage hiked to INR 5 lakh.
  • Revival of trust on small banks.

Long Term Capital Gain Missed

Mutual fund managers and investors were expecting the government to
re-introduce LTCG tax. The market was expecting either removal of LTCG
tax or extension of holding period to qualify for same, to boost market
sentiment. However, this remains completely untouched as of now.

In Short:

  • Long term Capital Tax remains untouched.

Impact on Non-Resident Indians

The taxation structure of stateless people (someone who is “not
considered as a national by any state under the operation of its law”)
has been a matter of concern for quite some time. There is a probability
that an individual can organize his affairs in such a fashion that
he/she shall not be taxable under any jurisdiction.

This has been in practice among high net worth investors to evade
tax. However, as per new regulations, even if the NRIs have not stayed
in India for a long duration, shall still be liable for tax, if they are
not liable for taxation under any other country, provided the income is
derived from Indian business/profession.

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There is no intention to tax income that bonafide workers earn
overseas. The amendment is only for those who abuse the taxation norms.

In addition to that, the terms to qualify as an NRI have been
changed. Budget 2020 proposes that only those people shall qualify as
NRI, whose stay in India is less than 120 days, instead of 183 days.

In Short:

  • NRIs shall be taxable, if they aren’t taxable under any other country’s tax jurisdiction.

Conclusion

All in all, just like many other sections of the society, the budget
has left the investors unsatisfied. Apart from hike in cover, there was
no stimulus for equity and commodity market to raise market sentiments.

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Lakewater Advisors
The founder, Pankaj Singhania, is a Chartered Accountant and Cost Accountant. He has a distinctive knack for analyzing company fundamentals in tandem with management credentials.
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