QBudget: Will Suresh Prabhu Deliver? India Inc Eyes Tax Exemptions

Catch all the top news and views on the upcoming Union Budget on QBudget.

Railways’ total revenue is up 5.8 percent in the first 10 months of this financial year. (Photo: PTI)

1. Railway Budget: More Public Cash Eyed as Turnaround Remains Elusive

Indian Railways will have to depend on more government support and borrowing to fix their finances in its Budget, with the Centre reluctant to unveil steep fare hikes ahead of key state elections, officials told Reuters.

Railways’ total revenue is up 5.8 percent in the first 10 months of this financial year, below the double-digit pace in the past.

A proposed 24 percent hike in the salaries of 26 lakh employees and pensioners, meanwhile, will land the railways with a wage bill of about $4.7 billion.

Two senior government officials said raising freight tariffs significantly was not on the cards, and that a steep rise in passenger fares in Thursday’s railway budget also was unlikely as fewer-than-expected travellers catch the train and an industrial slowdown crimps the growth of freight.

Read more here.

2. FPIs Turn Cold to Indian Bonds Ahead of the Budget: Livemint

Foreign portfolio investors (FPI) are turning cold to Indian bonds, which were until now their preferred investment among emerging market debt, given their high yield. Dollar inflows, reduced to a trickle by the second week of January, have now turned into outflows.

Data from depositories shows that FPIs have pulled out $145.34 million between 1 January and 22 February. In February itself, FPIs have sold $376.1 million of bonds. Indian bonds are one of the highest yielding debt instruments among emerging market debt, making them a preferred purchase for FPIs at a time when globally, a regime of negative interest rates has begun.

However, high returns don’t seem to be enough for FPIs anymore. FPIs are concerned that the government may not be able to stick to fiscal deficit targets owing to pressures of social spending and recapitalizing banks which could put the country’s rating at risk. The sovereign rating of India is just a notch above investment grade and a downgrade would cut off a large part of global investor class for Indian companies.

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3. Does Budget 2016 Matter to Market? ET

Pharma, information technology and petroleum sector stocks attracted nearly half of the incremental growth in the domestic mutual fund industry’s equity exposure since the last Union Budget.

An Economic Times report says MF assets in the three sectors – IT, pharma and petroleum – climbed by Rs 21,134 crore, which was nearly 48 percent of the total rise in MF exposure to equities during the period.

This was probably because a delay in key reforms and a big selloff in global equities turned fund managers’ focus to non-reform-centric sectors. Between March 2015 and January 2016, mutual funds invested a total of Rs 86,440 crore in domestic equities.

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4. Rail Budget 2016: Cut in Fuel Costs Saved Suresh Prabhu: FE

An editorial in The Financial Express lauds Suresh Prabhu’s fresh approach to raising revenue, as seen in his first Railway Budget, and his efforts to usher in commercial accounting as suggested by the Debroy committee. The article concedes that the cut in fuel costs saved Prabhu but says commends his work on capacity expansion.

If the estimates for capital spends that FE reported on Wednesday – Rs 58,000 crore at the end of December – are indeed correct, FY16 could see a total capital spend of close to Rs 70,000-75,000 crore, a really big achievement given the railways have never invested such large sums in such a short time. More crucially, the money is understood to have been spent on doubling and electrification, which will help the railways add share in the freight segment. Given the railways cannot raise freight rates further without losing market share to roads, it must add capacity – the recent changes in wagon design to raise the effective payload per wagon will also help.

5. India Inc Bets Big on Tax Reforms in Budget: BS

Corporate India is looking to next week’s budget for wide-ranging tax reforms like abolition of the Minimum Alternate Tax (MAT) and clarification on the tax status for Special Economic Zones (SEZs) apart from the government burying the ghost of retrospective tax once and for all.

Prime Minister Narendra Modi and Finance Minister Arun Jaitley had promised tax and banking reforms during their interaction with corporate leaders during Make-In-India week, to take the manufacturing sector’s share in the gross domestic product from the current 18 percent to 25 percent.

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6. Infuse More Capital in PSU Banks to Avoid Rating Pressure, Says Moody’s: ET

Ratings of public sector banks (PSBs) could face pressure if the Union Budget 2016-17, to be presented next week, does not increase the amount of capital the government plans to infuse in them, Moody’s Investors Service cautioned today.

Front-ending of provisioning for non performing loans (NPLs) requires a boost in capital levels of PSBs, it said.

Consequently, unless the government revises upwards its capital infusion plan for the banks in its upcoming budget, the banks will see negative pressure on their credit profiles.

Srikanth Vadlamani, V-P and Senior Credit Officer, Moody’s 

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7. Alternative Investment Funds Want Parity on Taxation: BS

The Alternative Investment Funds (AIF) industry, comprising private equity (PE) and venture capital (VC) players, is expecting Budget 2016 to align the tax rate for listed and unlisted market transactions.

At present, capital gains tax on investments in publicly-listed companies are treated as long-term capital gains (LTCG) and taxed at 0% if held for over a year and as short-term capital gains and taxed at 15% if held for less than a year.

However, in an unlisted company (or startup), while investments for over a period of three years are considered as long-term and attract a tax of 20%, investments of less than three years fall under short-term capital gains and are taxed at 33%.

This, the AIF industry, says acts as a deterrent to investing in riskier assets.

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8. Budget Jitters Take Toll on ITC Stock: Livemint

The ITC share has a resigned air about it as the Budget day nears, as investors fear cigarettes may be hit by another round of excise duty hikes. The past few weeks have seen the share underperform the BSE FMCG index as well as the broad market. The surprise then, really, would be if it is spared an aggressive hike. In the past one year, the stock is down 26 percent, while the FMCG sector index is down by 17.2 percent.

A Livemint report on 24 February said retail cigarette prices have already gone up anticipating the hike and that stock market analysts are pencilling in an 8-10 percent hike in duties. That would not be considered a bad thing, especially if the increase were around the 8 percent level. The fear is if the government takes the duties up by a much higher quantum, say a 15 percent increase.

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9. Developers Seek Exemption From Dividend Distribution Tax in Budget 2016: BS

After getting relief from capital gains and minimum alternate taxes last year, developers now seek exemption from the dividend distribution tax (DDT) for real estate investment trusts (REITS) in the upcoming Budget to make them attractive for investors. Despite tax concessions last year, REITs have not taken off.

Their argument is that after paying almost 20 percent DDT, rate of return on these units would not be lucrative compared to other investments.

At the current times, post-DDT, REITs would give around 6.5 percent return to investors which would not be viable to run REITs. This is so because that same interest rate could be easily earned through bank deposits.

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