Tax Reforms in Taxing Times!

Budget times are busy times for making predictions. For staunch value investors like us, it is much less exciting, given our frivolous faith in budget predictions. Forecasting is fabulous for making headlines and news stories, but much less use for serious investment decisions. With that caveat, what we intend to do here is to set out the broad contours that the budget might take given the current political and economical narrative in the country, with keen awareness that specifics when it comes, could be far different from what we surmise here.

Here are some broad pointers to this year's budget:

• Heady days of budget dwelling on taxes for innumerable goods and services have long gone with GST council taking the reins on indirect taxes. With indirect element axed, direct taxes should take the dominance. Moreover, it is pay-back time on DeMon. It is time for the Govt. to pass on the gains to square off the pains of note-ban. All these mean, thrust of this budget is likely to be Direct Tax reforms. Expect cuts in corporate and personal taxes, though quantum is anyone's guess. Focus will be on widening the tax base with low tax rates and simplified exemptions. Shift from informal to formal economy drivenby note-ban should help in pushing in this direction.
• As part of rationalizing exemptions, capital market may be asked to bear its fair share, as hinted by PM in his recent speech. There are various options the FM could consider on this including increasing the duration for Long-Term Capital Gains (LTCG) from existing 12 months to 36 months or bringing the LTCG into tax net or increasing the tax rates for STCG (Short-Term Capital Gains). Markets seem to have reconciled for one of these in the upcoming budget.
• Though less focus is expected on indirect taxes, to account for delay in GST implementation, FM may be tempted to align some of the rates to GST rates, esp. in the case of service tax. Expect some hike in service tax, if not full alignment to GST rates.
• Engineering a turnaround in Investment cycle is likely to be a key focus as well as a challenge in this budget. Of the two engines that drive investment cycle i.e private investment and public investment, private investment cycle is under severe slump as it suffers from gross under utilization and stressed corporate balance sheets. One can expect an accelerated allocations to public spending like road, railways, constructions and rural infrastructure.
• Rural recovery is likely to be a key theme in this budget as in the previous one. Heightened allocations to agricultural sector and other rural schemes will be one of highlights of this budget. This coupled with increased allocations to road, constructions, rural infrastructure can turn the rural wage growth cycle and lead to sharp recovery in rural consumption.
• On the rural welfare, Govt. may have something up its sleeve. As part of payback for DeMon pangs, some form of direct transfer to rural households (esp. for below poverty line (BPL)) may be on cards. The buzz doing the rounds is that some kind of minimum income scheme is likely for the rural BPL households. Any such scheme, if it comes, can reignite the rural growth story, besides providing political rewards to the current Govt.
• On the fiscal consolidation, though it will be tempting for the govt. to relax the fiscal restraint, rising Gsec yields and threat of outflows from debt markets will keep any such temptations under check. Though growth stimulus is critical, govt. is unlikely to deviate much from the laid out fiscal roadmap (fiscal deficit target as laid out by FRBM mechanism). More so, with tax collections expected to be buoyant on note-ban effect.
• There will certainly be new measures to further boost the shift from informal to formal economy by providing more incentives in the form of tax breaks for cashless transactions.