Budget 2018: Prabhudas Lilladher expects corporation, income tax rate cuts

In Union budget 2018 farm loan waiver/subvention a possibility as a boost to affected areas in rural India and sops for agriculture

Finance Minister Arun Jaitley will be presenting Budget 2018 in Parliament shortly today. This will be his fifth and the Narendra Modi government’s last full Budget in the present term.

Here are the details of broking firm Prabhudas Lilladher’s Budget 2018 expectations:

• Fiscal deficit likely to be higher than the estimated 3.2% of GDP in FY18 on lower growth and reducing the same will be a challenge in FY19, unless we see an increase in GDP growth.

• Expect to see a roadmap for reduction in corporate tax rates and personal income tax for lower income brackets benefitting the middle class. .  

• Farm loan waiver/subvention a possibility as a boost to affected areas in rural India and sops for agriculture, be it in terms of supporting increased mechanisation or sops to improve farm income.

• With the private capex still remaining low, government may resort to increased market borrowings going forward to fund government capex, the budget will continue to focus more on public sector/government capex.  

• Hence, we expect to see slightly loose fiscal policy and the government may not adhere to the earlier targeted  tight fiscal levels to aid growth in an election year.  

With elections in mind, the key theme of this budget could remain as a balancing act between improving  growth managing the set fiscal targets and lower tax rates  especially for the lower segments and rural benefits with sops to the masses

Increase in basic exemption limit from Rs250,000 to Rs350,000 and Rationalization of tax slabs.

Increase in exemption under 80C to move up from Rs150,000 to Rs250,000

Investments in instruments which fund long term infrastructure bonds to be tax exempted with limit of Rs50,000

Increase in Medical expense/helath insurance expenses  from Rs15,000 to Rs50,000

Possible Re-introduction of standard deduction for salaried class with limit of Rs50,000 – 100,000

Interest on self occupied property limit to be increased from existing Rs200,000

Interest subvention announced for house loan upto Rs1.2m  at 3% and upto Rs0.9mn at 4% and upto Rs0.6mn at 6.5%  to continue

Roadmap for the reduction in corporate taxation as proposed in the earlier budget

In its downward glide path on fiscal deficit FY18(BE) target of fiscal deficit of 3.2% may not be achieved. With the slow down in GDP growth, it will be a tall order to curtail the deficit under 3.2% in FY18. It will be also a challenge to  curtail in FY19.

Expect to see additional allocations for rural, infrastructure development, health and education in addition to PSU bank re capitalisation, may see an increase in borrowings

Government had budgeted Rs5.8trn of gross borrowing and Rs4.23trn of net borrowing (including additional borrowing) in FY18 and restricting to it could be a challenge.

Expect to see hike in passenger fares and freight rates to compensate for the increase in crude price, meet modernization of railways.

With the economic growth still below the expected lines, expect to see a shortfall in tax revenue.

Corporates  for a change likely to have better 2HFY18 and hence tax collection is likely to be higher  than estimates.

The  divestment income targets seems to be too aggressive for FY18 and hence expected to see a shortfall. Cash rich PSUs may be forced to buy out shares of other PSUs to meet the governments disinvestment target.

Despite a steep increase in crude oil prices in the last two months, the government has passed on the hikes to the customers. Whether this will be maintained going forward into FY19 is the big challenge? Should that not happen, an increase in deficit a real possibility.

We expect to see an increased fiscal pressure in FY18 on account of an increase crude oil prices.

Our  GDP growth estimates for FY18 remain at 6.5% .

Government has the ambitious plans of “Make in India”, where we believe there will be more thrust towards promoting domestic industries even in areas like defence. We expect to see increased defense expenditure, sops on the farm front.  

Automobiles:  

– Restoration of incentives for R&D in the form of weighted tax reduction

– Lower tariffs on components for electric vehicles

– For passenger vehicles, implementation of two tax rates instead of the multiple tax rates currently

Financials:  

– Banking reforms on continued re capitalization of banks

– Separate exemption for insurance in 80C, increased exemption limits for health insurance

– Increase limits and tweak other caveats like income for participating  in the affordable housing segment especially on classification according to Tier of cities  

– improvement and easing for loans to MSME/SME sector especially on MUDRA and other schemes.

Cement:

– Low Cost Housing sops should improve demand. No major changes in taxation expected.

IT:  

– No major change is envisaged

Infrastructure:

– Expect to see increased allocations on rural spending, agriculture, roads to benefit EPC companies as public sector capex is driving growth while private sector capex is falling.

– Higher budgetary support for road sector/PMGSY/PMGAY

– Re introduction of infra bonds

Defence

– Increase in defense capex  by over 15%  after being stagnant for the last few years

Agriculture:

– Start of a DBT scheme for farmers, reduction in duties for pesticides and agrochemicals benefiting the farmers. May also give sops for farm mechanization

FMCG:

– Most critical is taxation on cigarettes and tobacco.

Pharma:  

– Curtailing benefit on R&D Expenses from 200% to 100% in FY18 for tax purposes, could get further reduced

– With decline in US tax rates from 35% to 21%, Indian companies with major US exposure could file ANDAs in the US from US subsidiaries for the benefit. GOI needs to look at this to rationalise tax .  

– Before the GST implementation, the blended tax rates were at 9% and with GST it is at 12%. This is not in line with the stated policy of making available medicines at lower prices.