In this edition, we talk about the union budget and why the proposals on taxation have left many unhappy. We also talk about the budget proposals on job creation, and Mankind Pharma’s $1.6 billion acquisition.
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tl;dr Hear the article in brief instead?
Tax his land, Tax his bed, Tax the table at which he’s fed.
Tax his tractor, Tax his mule, Teach him taxes are the rule.
Tax his work, Tax his pay, He works for peanuts anyway!
Tax his cow, Tax his goat, Tax his pants, Tax his coat. Tax his ties, Tax his shirt, Tax his work, Tax his dirt.
Tax his tobacco, Tax his drink, Tax him if he tries to think.
Tax his cigars, Tax his beers, If he cries tax his tears.
Tax his car, Tax his gas, Find other ways to tax his ass.
Tax all he has, Then let him know, That you won’t be done till he has no dough…
– Author unknown
Back in the 1970s, the then prime minister Indira Gandhi, who was also the finance minister, had proposed raising the highest tax rate to a whopping 97.5%.
After much consternation, Gandhi had to withdraw the policy soon after and settle for a significantly lower rate of 75%. But since hardly anyone actually paid taxes back then—India’s per capita income was just about Rs 1,000 then– and fewer still had incomes above Rs 5 lakh, it did not really matter to the vast majority of people.
Mercifully, we now live in times when the country’s tax regime is far less usurious, at least on paper.
Having said that, as the tax base has widened manifold since the Indian economic liberalisation in the early 1990s, any tinkering with the numbers impacts crores of taxpayers, a vast majority of whom belong to the great Indian middle classes.
Perhaps, this is why, in an ostensible bid to give India’s salaried class some relief, Finance Minister Nirmala Sitharaman tweaked personal income tax slabs in the new tax regime and raised the standard deduction from Rs 50,000 to Rs 75,000. In effect, a person in the 30% tax bracket would get to save Rs 17,500 per year.
But when Sitharaman tweaked rates of taxes on long- and short-term capital gains and took away the benefit of indexation from asset classes such as real estate, it did draw criticism from some quarters.
Sitharaman upped the tax rate on long-term capital gains to 12.5% from 10% and raised the exemption limit to Rs 1.25 lakh a year from Rs 1 lakh. She also lifted the tax rate on short-term capital gains on some financial assets from 15% to 20%. Moreover, unlisted bonds and debentures were brought under the ambit of capital gains.
But there was more. As we just mentioned, the government took away the benefit of indexation on the sale of property. This basically means individuals selling their houses or shops or a piece of land will no longer be able to adjust the purchasing price using inflation and bring down their capital gains.
You see, before the budget, the sale of property was subject to a 20% tax on capital gain, with the benefit of indexation. This adjusted the purchase price for inflation, effectively bringing down the taxable capital gains. The budget has removed the indexation benefit but reduced the tax rate to 12.5%.
The finance minister said the government had tried to simplify the capital gains tax structure. Its critique, however, claimed that with indexation gone, in many cases, the tax liability for people looking to sell their property would go up.
Sitharaman also raised the Securities Transaction Tax (STT) on derivatives trading, even as she abolished the angel tax on all types of investors putting funds in startups. Moreover, she said that buyback of shares will be considered an income for beneficiary shareholders, and just like in the case of real estate, the benefit of indexation will not be available.
In her budget speech the finance minister also said that her government would begin a comprehensive review of the Income Tax Act of 1961, an exercise, she said, will be completed in six months.
So, where do we go from here? Will tax rates on long- and short-term capital gains be hiked further in the years ahead? Will the tax hike affect returns on your investment?
We are not clairvoyants, so we don’t know. But if you want to put off your investments simply to avoid taxation, that may not be the smartest thing to do. So, decide your goals and stick to your asset allocation, adjust a little if you must, but keep investing. A few tax tweaks shouldn’t matter much in the long run.
On the Job
More than taxation, what the finance minister would rather have us talk about are her proposals on generating employment. Sitharaman proposed three new employee-linked incentive schemes in the budget. These schemes aim to increase enrolment with the Employee Provident Fund Organization, offer support to first-time employees and help employers create jobs.
The government will incentivise companies, including those in the manufacturing sector, to offer internships as well as employment to people, the minister said. She also said that the government will focus on skill development programmes and will offer loan subsidies for higher education.
Sitharaman proposed government spending in excess of Rs 2 trillion over the next five years and hopes to create as many as 4.1 crore jobs. A big chunk of the budget, Rs 1.48 trillion, has been set aside for education, employment and skilling initiatives, with the aim of training 20 lakh youth over the next five years.
What explains the thrust on employment generation? Well, the finance minister knows that unemployment has to be taken head-on. Although the official data puts the rate of unemployment at 6.7%, the Centre for Monitoring Indian Economy reported the rate to rise sharply to 9.2% in June 2024.
Will the government’s job creation efforts lead to immediate results?
Experts say some sectors such as manufacturing will benefit, but only in the medium term. They also say that some low-end sectors such as leather, textiles, garments, basic chemicals and basic machine tools might see a quicker response, but that an overall recovery will take time. Other sectors that could see come uptick in the short term include construction, engineering, financial services, retail, e-commerce, power and energy, tourism and agriculture.
Other Budget Highlights
- Cuts tax rate for foreign companies to 35% from 40%.
- Cuts TDS on e-commerce operators to 0.1% from 1%.
- Cuts basic customs duties on gold and silver to 6%.
- Abolishes angel tax on all types of investors in startups.
- Proposes Rs 1,000 crore venture capital fund for the space-tech sector.
- Lowers fiscal deficit to 4.9% from 5.1% in interim budget.
- Aims to bring down the fiscal deficit to 4.5% by next financial year.
- Expects FY25 tax receipts at Rs 32 trillion.
- Cuts gross market borrowings to Rs 14.01 trillion for 2024-25
- Proposes FY25 capex at Rs 11.11 trillion, or 3.4% of GDP
- Allocates Rs 1.52 trillion for agriculture and allied sectors.
- Allocates Rs 2.66 trillion for rural development.
- Proposes credit support to MSMEs during periods of distress.
- Proposes to increase small Mudra loans to Rs 20 lakh for MSMEs.
- Proposes 12 industrial parks under National Industrial Corridor Development Programme.
- Proposes govt aid for 30 million affordable housing units in urban and rural areas.
A Giant Leap for Mankind
Moving on to other news, there was little action in the corporate world apart from quarterly earnings announcements. The most significant non-earnings development this week was drugmaker Mankind Pharma’s acquisition of Bharat Serums and Vaccines Ltd (BSV).
Mankind is buying 100% of BSV from Advent International, one of the world’s largest private equity firms, for an enterprise value of Rs 13,630 crore, or about $1.63 billion. The deal value is almost three times the level at which Advent had acquired BSV in 2019.
This is one of the largest acquisitions in India’s pharmaceutical industry and is significant for Mankind Pharma, which floated its IPO in April last year and commands a market value of more than Rs 84,000 crore after its shares nearly doubled since its stock market debut.
The acquisition positions Mankind, the maker of Manforce condoms and pregnancy kit Prega News, as a market leader in the women’s health and fertility drug market. BSV has a niche portfolio offering in women’s Health, encompassing the entire lifecycle – from fertility to post-pregnancy. BSV will also give Mankind access to products in critical care that have a high entry barrier.
Market Wrap
Although the budget initially received a tepid response from the stock markets, the benchmark indices zoomed on Friday to end the week in the green.
The 30-share Sensex ended the last five trading sessions up about 0.8% while the broader Nifty did better and rose more than 1%.
Nifty stocks that led the rally included Tata Motors, HDFC Life, NTPC, Sun Pharma, BPCL, SBI Life, Titan, Infosys, ITC, NTPC, Divi’s Labs, and Adani Ports.
Q1 Earnings Snapshot
- DLF revenue falls 4% but a four-fold jump in other income pushes profit 23% higher.
- Tech Mahindra revenue falls 1.2% to Rs 13,005 crore but beats forecasts, profit up 23%.
- Axis Bank standalone profit rises 4% to Rs 6,035 crore, misses forecast on higher provisions.
- Nestle India profit up 7% at Rs 746.6 crore, lags estimate; revenue growth slowest in 8 years.
- Hindustan Unilever profit rises 2.7% to Rs 2,538 crore on volume growth, matches forecasts.
- L&T consolidated net profit up 11.7% at Rs 2,786 crore, tops forecasts.
- Bajaj Finance net interest income climbs 25% to Rs 8,365 crore, profit lags forecasts.
- Strong demand for premium beer pushes United Breweries profit 27% higher to Rs 173 crore.
- Diageo-owned United Spirits beats profit estimates with a 25.6% rise to Rs 299 crore.
- Adani Green Energy’s consolidated profit nearly doubles to Rs 629 crore from Rs 323 crore.
- Ashok Leyland profit falls 8.8% to Rs 526 crore, misses forecast.
That’s it for this week! Until next week, happy investing!
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