1. Saturday, 01 February 2020
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Notes from an Investor's DiaryNotes from an Investor's DiaryNotes from an Investor's DiaryNotes from an Investor's Diary
Union Budget FY21 - A caged canary aspiring to fly high
The Finance Minister read out the longest ever budget speech. By the end of it she was too
exhausted to even complete the speech. This pretty much explains the state of affairs.
Like a caged canary aspiring to fly in the blue sky, the finance minister very enthusiastically
read out the vision for new modern India. However, after two hours of aspirational efforts, it
was evidently clear that she does not have enough strength to break the shackles and release
herself. In the end, she was settled in the cage, totally exhausted and her wings ruffled.
The positive take away from the budget statement is that the aspirations are really high and
the vision of new modern India very clear. The government for the first time made an
unambiguous admission that the way forward is a progressive socio-economic structure that is
egalitarian but encourages and supports private enterprise. It is a major achievement to
officially abandon the socialist legacy that focused on curbing demand rather than enhancing
supply and hindered the seamless integration of Indian economy in the global economy.
Positive take away
The following thoughts in budget speech indicate that some significant structural reforms
could be implemented in next few years. These reforms with stabilization of the already
implemented changes like GST, IBC, simplified corporate tax structure, etc could help in
propelling the growth to the desired level:
• Private participation in LIC, Railways, & Public Sector Banks;
• Corporate farming through long term leases to improve productivity and profitability of
farm sector;
• A comprehensive vision for Integrated rural development;
• Healthcare in PPP mode;
• Admitting commercialization needed in education and training sector, and permitting
FDI and ECBs; admission that education in humanities stream is mostly unproductive;
and allowing online degree courses;
• Exploitation of idle farm and railway land for solar energy production;
• Unleashing power sector to grow like the telecom sector did in past 15years - prepaid
metering and portability of service provider;
• Acknowledging the needs of modern businesses and society - local data storage,
investment in modern technologies likes analytics, machine learning, robotics, bio-
informatics and Artificial Intelligence, ensuring high quality standards; world class
logistics, etc.;
• Focusing on the strengths of India - iconic heritage centers; preparing teachers and
healthcare workers for the global communities; preparing Indian universities for global
students;
• Increasing the age of marriage and motherhood for women

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Negative take away
The incongruence between the intent (Part 1) and action (Part 2) is the key negative in the
budget. For example consider the following:
• It seems that the government has decided to come out openly in favor of US, in the
global trade war. The changes in duties on consumer items imported mostly from China
clearly indicate a political motive, besides an economic one.
• The tax structure for individual tax payers has been made more complicated, contrary
to the promise of simplification. Understanding the new tax regime for individual and
HUF tax payers would need help of even more qualified professional then before,
contrary to the statement made by finance minister.
• It's the sixth straight budget that talks about eliminating tax terrorism. The finance
ministers admit year after year that tax terrorism is a realty and it is hindering growth.
So far there is little delivery on the promise of eliminating this undue harassment of tax
payers. Rather each new promise further erodes the credibility of the government.
• The allocation of resources to the critical sectors like health, education, rural
development is not commensurate with the statement of intent made in first part of the
budget speech.
• The reluctance to temporarily suspend FRBM application is perplexing. The resource
constraint is too conspicuous. The benefits of additional spending on reforms agenda
are all well defined. The benefits of violating FRBM targets, if the reform agenda as
outlines in Economic Survey and Budget speech is religiously implemented, would
outweigh the cost in the short term.
• The economy wanted more money in consumers' hand. The method minister has
chosen to discourage savings by opting the new personal tax rate structure. This may
not be the best way of promoting consumption.
• The removal of dividend distribution tax shall result in materially higher taxation for the
investors. This is contrary to the intent.
Key promise
Through the budget, the finance minister has made two key promises. Delivery on these two
must be closely watched
1. The government shall aim:
• To achieveseamless delivery of services through Digital governance
• To improve physical quality of life through National Infrastructure Pipeline
• Risk mitigation through Disaster Resilience
• Social security through Pension and Insurance penetration.
2. The government shall carry out a fundamental overhaul of Centrally Sponsored Schemes
and Central Sector Schemes to align them with emerging social and economic needs of
tomorrow, and to ensure that scarce public resources are spent optimally.

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Comprehensive agenda for integrated rural development
1. Encourage State governments to undertake implementation of following model laws
already issued by the Central government:
• Agricultural Land Leasing Act, 2016
• Agricultural Produce & Livestock Marketing (Promotion and Facilitation) Act, 2017
• Agricultural Produce and Livestock Contract Farming and Services (Promotion and
Facilitation) Act, 2018
2. Comprehensive measures for one hundred water stressed districts.
3. Scheme to provide money to 20 lakh farmers for setting up stand-alone solar pumps; help
to another 15 lakh farmers solarise their grid-connected pump sets; and a scheme to
enable farmers to set up solar power generation capacity on their fallow/barren lands and
to sell it to the grid would be operationalized.
4. Encourage balanced use of all kinds of fertilizers including the traditional organic and
other innovative fertilizers to change the prevailing incentive regime, which encourages
excessive use of chemical fertilisers.
5. Creating warehousing, in line with Warehouse Development and Regulatory Authority
(WDRA) norms. Provide Viability Gap Funding for setting up such efficient warehouses at
the block/taluk level.
6. Village Storage scheme to be run by the SHGs. This will provide farmers a good holding
capacity and reduce their logistics cost.
7. Build a seamless national cold supply chain for perishables, inclusive of milk, meat and
fish, the Indian Railways tol set up a “Kisan Rail” – through PPP arrangements. Put
refrigerated coaches in Express and Freight trains as well.
8. KrishiUdaan to launched by the Ministry of Civil Aviation on international and national
routes for transporting perishable produce to help improve value realisation especially in
North-East and tribal districts.
9. For better marketing and export of horticulture produce, support States that adopt a
cluster basis approach with focus on “one product one district”.
10. Expand integrated farming systems in rainfed areas. Add multi-tier cropping, bee-keeping,
solar pumps, solar energy production in non-cropping season will be added. Zero-
BudgetNatural Farming (mentioned in July 2019 budget) shall also be included. The
portal on “jaivikkheti” – online national organic products market will also be strengthened.
11. Financing on Negotiable Warehousing Receipts (e-NWR) to be integrated with e-NAM.
12. NABARD re-finance scheme to be further expanded for NBFCs and cooperatives. All eligible
beneficiaries of PM-KISAN to be covered under the Kissan Credit Card (KCC) scheme.
13. Eliminate Foot and Mouth disease, brucellosis and PPR by 2025. MNREGS to be dovetailed
to develop fodder farms to facilitate doubling of milk processing capacity by 2025.
14. Framework for development, management and conservation of marine fishery resources.
15. Raise fish production, promote growing of algae, sea-weed and cage culture to create
employment in coastal areas.
16. Further expand on SHGs.

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Laying foundation for modern India
1. Policy to enable private sector to build Data Centre parks throughout the country to enable
domestic businesses to skill fully incorporate data in every step of their value chains.
2. Fibre to the Home (FTTH) connections through Bharatnet to link 100,000 gram
panchayats this year.
3. A digital platform to facilitate seamless application and capture of IPRs. An Institute of
Excellence, to established to work on the complexity and innovation in the field of
Intellectual Property.
4. Knowledge Translation Clusters would be set up across different technology sectors
including new and emerging areas.
5. Establish facilities for designing, fabrication and validation of proof of concept, and further
scaling up Technology Clusters, harboring such test beds and small scale manufacturing.
6. Initiate two new national level Science Schemes, to create a comprehensive database to
map of India’s genetic landscape considered critical for next generation medicine,
agriculture and for bio-diversity management.
7. To provide early life funding, including a seed fund to support ideation and development of
early stage Start-ups.
8. To establish National Mission on Quantum Technologies and Applications to open up new
frontiers in computing, communications, cyber security with wide-spread applications.
Focus on strengths
1 150 higher educational institutions to start apprenticeship embedded degree/diploma
courses by March 2021.
2. “Study in India” programme to get boost with Ind-SAT (qualifying test) to be held in Asian
and African countries.
3. Special training to teachers, nurses, para-medical staff and care-givers for employment
abroad.
4. Centralized Investment Clearance Cell to provide “end to end” facilitation and support,
including pre-investment advisory, information related to land banks and facilitate
clearances at Centre and State level to new entrepreneurs.
5. Schemes to harness solar power and maritime resources.
6. To establish an Indian Institute of Heritage and Conservation under Ministry of Culture.
7. Five archaeological sites to be developed as iconic sites with on-site Museums.

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Financial markets
1. Certain specified categories of Government securities would be opened fully for non-
resident investors, apart from being available to domestic investors as well.
2. The limit for FPI in corporate bonds, currently at 9% of outstanding stock, will be
increased to 15% of the outstanding stock of corporate bonds.
3. To improve investors’ confidence and to expand the scope of credit default swaps, a
legislation to be enacted for laying down a mechanism for netting of financial contracts.
4. Proposal to expand CPSE debt ETF scheme to a new G-Sec Debt-ETF. This will give retail
investors access to government securities as much as giving an attractive investment for
pension funds and long-term investors.
5. Partial Credit Guarantee scheme for the NBFCs to be expanded whereby the Government
will offer support by guaranteeing securities so floated.
6. Rs22,0bn provided to Infrastructure Pipeline as equity support to Infrastructure Finance
Companies such as IIFCL and a subsidiary of NIIF. They would leverage it, as permissible,
to create financing pipeline of more than `1,00,000crore. This would create a major source
of long term debt for infrastructure projects and fulfill a long awaited requirement.
7. GIFT IFSC has an approved Free Trade zone for housing vaults. It already has 19
insurance entities, 40 banking entities. It has also provided for setting up of precious
metals testing laboratories and refining facilities. With the approval of the regulator, GIFT
City would set up an International Bullion exchange(s) in GIFT-IFSC as an additional
option for trade by global market participants.
8. Proposal to sell a part of its holding in LIC by way of Initial Public Offer (IPO).
Key estimates

6. 01 tFecbruary2020
Tax proposals
Personal income tax
• No change in rate of taxation for individuals and HUF.
• Dividend income now taxable as income from other sources at the marginal rate of
taxation. If the amount of dividend from one source is higher than Rs5000, the paying
entity will deduct at source (TDS) u/s194 at applicable rate.
(Note: As per the Finance Bill, the capital gain on redemption of Mutual Fund Units is also
subject to TDS. However, it does not seem to be the intent of the statute, and may be clarified
later)
• Tax to be collected at source (TCS) in case of remittances by individual under Liberalized
Remittance Scheme (LRS) of RBI. TCS will be @5% in case of remitter submitting PAN and
Aadhar; otherwise it will be @10%.
• Tax to be collected at source (TCS) in case of payment to a tour operator for travelling
abroad. TCS will be @5% in case of remitter submitting PAN and Aadhar; otherwise it will
be @10%.
• To be categorized a non-resident, an Indian now will be required to stay abroad for 245
days, against 182 previously.
• A non-resident Indian, who is not taxed in any foreign jurisdiction, will become taxable in
India for his entire global income.
• NRI whose total income consists of only dividend, interest and fee for technical services
need not file return provided full TDS has been deducted from such income.
• Employees of Start Ups may pay tax on perquisite value of ESOP within 14 days of expiry of
48month from vesting, or date of sale of shares by them or the assessee ceasing to be the
employee of start up, whichever is earlier.
• The aggregate exempted contribution to NPS, Pension (superannuation) Fund, and
Recognized Provident Fund for an employee restricted to Rs7,50,000 per year. Any
contribution above this amount and interest/dividend on such excess shall be taxable as
perquisite.
New option tax rate structure for individuals and HUF
The finance bill proposes changes in personal tax structure by introducing an option to choose
a "lower tax rate without exemptions" regime. However, the rules proposed for opting the new
regime are so complicated that only a handful of individuals might be able to opt for it.
As per the new rules an individual or HUF may opt for the following tax rate structure:

7. 01 tFecbruary2020
This is subject to the following conditions:
1. Assessee having business income opting for the new structure shall have to follow the new
structure, till the business income continues.
2. Assessee not having business income may choose between the old and new structure every
year before filing the return.
3. Assessee opting for taxation under the new scheme shall not be entitled to the following
exemptions/ deductions:
• Leave travel concession as contained in clause (5) of section 10;
• House rent allowance as contained in clause (13A) of section 10;
• Some of the allowance as contained in clause (14) of section 10;
• Allowances to MPs/MLAs as contained in clause (17) of section 10;
• Allowance for income of minor as contained in clause (32) of section 10;
• Exemption for SEZ unit contained in section 10AA;
• Standard deduction, deduction for entertainment allowance and employment/
professional tax as contained in section 16;
• Interest under section 24 in respect of self-occupied or vacant property referred to in
sub-section (2) of section 23. (Loss under the head income from house property for
rented house shall not be allowed to be set off under any other head and would be
allowed to be carried forward as per extant law);
• Additional deprecation under clause (iia) of sub-section (1) of section 32;
• Deductions under section 32AD, 33AB, 33ABA;
• Various deduction for donation for or expenditure on scientific research contained in
sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section
(2AA) of section 35;
• Deduction under section 35AD or section 35CCC;
• Deduction from family pension under clause (iia) of section 57;
• Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD,
80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-
IAC, 80-IB, 80-IBA, etc).
However, deduction under sub-section (2) of section 80CCD (employer contribution on
account of employee in notified pension scheme) and section 80JJAA (for new
employment) can be claimed.
Dividend Distribution Tax
• Section 115-O providing for dividend distribution tax (DDT) @15% plus applicable
surcharge omitted.
• Dividend to be taxable in the hands of recipients at the marginal rate of taxation.
• In case of corporate recipients, the dividend received not taxable to the extent it is
distributed to the shareholders of the recipient company latest by one month before filing
the IT return for the financial year to which the dividend relates.
• In case the amount of dividend exceeds Rs5000 the paying entity shall deduct TDS @10%.

8. 01 tFecbruary2020
Other
Exemption to Sovereign wealth fund
Income by way of dividend, LTCG capital gain or interest received by specified soveriegn wealth
funds from investments made in infrastructure companies before befoe 31 March 2024 shall be
exempt from tax.
Safe harbour limit of 5% under section 43CA, 50C and 56 raised to 10 per cent
No presumptive taxation of gains, in cases the stamp duty value is upto 110% of the sale
consideration in case of transfer of land or building or both. Earlier this limit was 105%.
Date of acquisition for side pocketed portfolio of mutual funds
It is clarified that the date of acquisition of the units of segregated (side pocketed) portfolio of a
mutual fund shall be the same as the date of acquisition of the original units.

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Some key budget statistics

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Tax collection trend
Fiscal improvement paused

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Reliance on small savings remains high, market borrowing to rise
Sharp rise in non-debt capital receipts (mostly disinvestment)

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Trends in government expenditure
Trend in sectoral allocations

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Important disclosures
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brokerage, money management, equity research or investment advisory services of any kind.
Please take advise of a qualified and registered investment advisor before taking any
investment decision.
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account the specific investment objectives, financial situation and the particular needs of any
specific person. Investors should seek financial advice regarding the appropriateness of
investing in financial instruments and implementing investment strategies discussed in the
reports.
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