Tax rate increase on super-rich a surprise move

Sampath Reddy, CIO, Bajaj Allianz Life

Overall, the budget has tried to reach out to various sections of the society and has been a balanced and forward-looking one—promoting ease of living. It has focused on segments like digital economy and infrastructure. Also there has been a focus on promoting Electric Vehicles with large benefits.

For infrastructure, the government intends to provide Rs. 100 lakh crore over the next 5 years, which may help to revive the investment cycle. For the financial sector, PSU bank recap of Rs. 70,000 crore has been provided (which is above expectations), and also announced various measures for the NBFC sector, which may reduce the stress in the sector in the near term. For the digital economy, the government wants to promote digital transactions and cash-less economy, by imposing 2% TDS on cash withdrawals above Rs 1 crore per year from a bank account, no transaction costs or merchant discount rate on various digital modes of payment; and finally also using the digital medium to increase tax compliance.

From a markets perspective, the government’s proposal to increase the minimum free float (public shareholding) limit from 25% to 35%, can lead to an increase in supply of equity paper in the markets. On the positive side, the government has maintained fiscal discipline (announced fiscal deficit target of 3.3% for FY20 vs 3.4% earlier, and plans to reduce it to 3.0% by FY22), announced intent for foreign sovereign government borrowings, which has benefited the bond markets.

On the taxation front, the government has extended lower corporate tax rate of 25% for companies having annual turnover up to Rs. 400 crore (compared to Rs. 250 crore before), and this was along expected lines. However, the increase in effective tax rate on high net worth individuals (those earnings more than Rs. 2 crore annually), and especially for the super-rich (those earning Rs. 5 crore and above annually)—where effective tax rate has been increased by 7%, has been a surprise move.

The author is the CIO of Bajaj Allianz Life.