1

Policy Action - Building on the

Groundwork

In its first major podium after elections, the returning

government has reiterated its reformist agenda by

laying out 10 point mission statement. The agenda

aims to combine its societal agenda for better living

standards for all with capitalist ideals of active private

partnerships as India lays the groundwork to become

a US$5 trillion economy in the next few years. The

emphasis is clearly on a long term structural shift

rather than short term spike in GDP growth rates.

Key highlights

• Fiscal deficit maintained at 3.3%

• Re-emphasis on Affordable Housing

o Increased benefits for home buyers of affordable

housing through tax deductions

o Model tenancy laws – Boon for people living in

rented properties

• Overseas government borrowings in foreign currency to

alleviate pressure on domestic bond market and

stabilize currency reserves.

• Super Rich Tax – Surcharge on individual income tax

for individuals earning above Rs. 2 Cr

• Minimum public shareholding in listed firms proposed to

be increased to 35% from 25%.

• Make In India – Tax exemptions for sunrise and

advanced technology areas

• Angel Tax – Start-ups and investors who file requisite

declarations and provide information in their returns not

to be subjected to scrutiny in respect of valuations of

share premiums. E-verification will be done to avoid

hassles to startups.

• Electric Vehicles – Tax Incentives for production &

ownership of EV’s

• Reduction of corporate tax rate for companies with a

turnover of upto Rs 400 Cr.

• Divestment target at Rs. 1,05,000 Cr

2

Encouraging Foreign Participation

The government has identified the need to raise large

amounts of capital to fund growth and infrastructre at low

cost. Further, the need to fund startups and emerging

technologies vital for import subsitution and self

sufficiency have not gone unnoticed. For this purpose the

union budget encompases a slew of benefits to encourage

foreign capital flows. The government has also proposed

easing operational concerns of foreign investors doing

business

• Relaxation in norms for KYC of foreign investors

• 100% FDI for insurance intermediaries. FDI caps in

other sectors like aviation, media and insurance will be

relooked

• Permit investments made by FIIs/FPIs in debt securities

issued by Infrastructure Debt Fund – Non-Bank Finance

Companies (IDF-NBFCs) to be transferred/sold to any

domestic investor within the specified lock-in period.

• FPI will be permitted to invest in debt instruments

issued by REITs & InvITs

• NRI portfolio scheme route and FPI route to be merged

Fillip To Retail Investing In Financial

Markets

With an eye to channelize domestic savings into the

equity and debt markets, the union budget has proposed

incentives to deepen the financial markets

• Provide benefits in line with equity linked savings

schemes (ELSS) to ETFs to promote long term retail

ownership

• Make necessary changes to the infrastructure of

depositories to allow retail investors to trade T-Bills

• Increase minimum public shareholding in listed entities

to 35%. This is likely to lead to fresh issuances by

promoters amounting to roughly Rs. 3.5 lakh crore

3

Personal Taxes

The government commended taxpayers as tax

collection revenues saw double digit YoY growth

during the last 5 years. While the government did not

change core tax slabs or rates, it focused on

seamless compliance and redressal mechanisms

Key proposals

• Interoperability of PAN & Adhaar for filing income tax

returns

• Redressal for scrutiny & errors to be made seamless

and online. Faceless e-assessment for verification and

transaction discrepancies

• Prefilled income tax returns based on information from

employers, banks, mutual funds, stock brokers and

other financial intermediaries for the purpose of correct

and seamless computation of incomes from salary,

bank interest & capital gains.

Apart from this the government aims to incentivise home

ownership and electric vehicles (EVs)

• Additional income tax deduction up to Rs 1.5 lakh on

interest on loans taken to purchase electric vehicles.

This amounts to a benefit of ~Rs 2.5 lakhs over the

loan period

• Lower GST on electric vehicle components to 5%

• Additional deduction over and above the Rs 1.5 lakh

deduction for interest on affordable housing loans

borrowed up to March 2020.

The government increased surcharge on individuals

whose taxable income is between Rs. 2 Cr and 5 Cr to

25% and those above Rs. 5 Cr to 37%

4

Business - Kickstarting Domestic

Manufacturing

With a view to develop a strong manufacturing base and

extend the Make in India campaign, the government has

proposed long term tax incentives for manufacturing hubs.

• Corporate Tax rate for companies with a turnover of up

to Rs 400 Cr reduced to 25%. For new manufacturing

companies there is no turnover limit.

• Investment linked tax exemptions U/s 35AD and other

indirect tax benefits to companies setting up large scale

manufacturing plants in industries like Semi-conductor

Fabrication (FAB), Solar Photo Voltaic cells, Lithium

storage batteries, Solar electric charging infrastructure,

Computer Servers, Laptops, etc.

• Imposition of customs duty on import of key electronics

and building material to promote domestic

manufacturing

• Relax rules for set off and carry forward of losses for

start ups

Other Initiatives

• In order to prevent the use of cash for business

payments, a TDS of 2% is proposed on withdrawal of

cash in excess of Rs 1 Cr in a given financial year from

bank.

• Incentivise digital payments by waiving digital

transaction charges

For a complete list of sector wise impact of the budget

refer the end of the document.

5

Equity Outlook

The government’s agenda of inclusive long term growth is

evident in the policies announced in today’s budget. From

a equity market standpoint the budget was a largely non-

event. The change in minimum public shareholding is

likely to have a bearing on the markets in the near term.

Timelines for such divesture and SEBI rules regarding

such divesture will be keenly awaited by the market. Also

the companies have actively engaged in buybacks are

likely to be impacted on the proposed buyback tax.

Renewed interest on infrastructure development and bold

policy actions around recapitalization of PSU banks and

rejuvenating the NBFC sector are widely seen as positive

steps in pump priming liquidity to the economy.

Debt Outlook

The fiscal deficit at 3.3% in line with the commitment set

out by the government is a big positive for the markets.

Further the intention of the government to tap the

overseas debt markets to finance government deficits will

be viewed positively by the debt and currency markets.

Overseas borrowing in foreign currency is likely to come

at a lower cost and will create additional forex buffers and

simultaneously stabilize the INR. It also means that supply

of G-Secs in the domestic debt market will reduce. This

direction is a big positive for other borrowers who are

likely to get better funding terms.

Reacting to the budget, long bonds saw a sharp rally. The

10 year G-Sec yields fell 15 basis points intraday as the

government surprised the street by sticking to the 3.3%

fiscal deficit. Going forward, we believe the duration story

in government long bonds has largely played out and see

limited opportunities in this space.

Given the current liquidity conditions and the market

environment, we prefer the short end of the curve and like

the current spreads in 2-3 year corporate bonds segment.

150-175 bps looks very attractive from risk reward

perspective. Also investors who understand credit risk and

are ok with some short term volatility should invest in

highly diversified largely AA oriented credit funds as we

see AA spreads widening over the AAA curve making

them attractive bets from a risk reward perspective.6

7

Auto & Auto Ancillaries

• The budget mainly focused on the promotion of Electric Vehicles

• The Government has moved the GST council to lower the GST rate

on electric vehicles(EV) from 12% to 5%

• An additional Income Tax deduction of Rs1.5 lakhs on interest paid

on EV loans

• Components of EV that will not be levied a custom duty: E-drive

assemblies, On board chargers, E-Compressors, Charging Gun

• Various small auto parts have seen increase in custom duty. Overall

the impact of increase in custom duty on these parts in the range of

2.5% to 5% will have negligible impact

• Impact on tire companies due increase in custom duties for Butyl

Rubber

• Butyl Rubber is a type of synthetic rubber (SBR), primarily used in

tires for inner tubes. Although we don’t have the break up

contribution of BR in SBR, we believe it could be around 10-15% of

overall SBR basket. Overall, SBR accounts for ~35% of RM basket

which is 60% of sales. Hence overall impact of 5% increase in

custom duty should have around 20 bps impact on margins of tire

companies

• Impact on Auto Companies due to increase in Minimum Public

Shareholding to 35%.

8

Banking & Financial Services

• Proposing to return regulatory authority from NHB to RBI –

necessary proposals are placed in finance bill – this is structurally

positive in long term as it improves regulatory supervision and

improves governance for NBFCs

• Government will provide Rs 1 lakh crore for the purchase of highly

rated pool assets of financially sound NBFCs – this will be through

one-time 6 months partial credit guarantee for first loss up to 10 -

since its highly rated pools and that too for financial sound NBFCs,

better rated NBFCs would be able to bargain better rates with this

credit enhancement facility.

• Interest rebate that was available to banks on certain bad and

doubtful assets will now be available to NBFCs as well - will

effectively bring down effective tax rate but will be more of a timing

difference.

• Increasing the deduction limit for interest on self-occupied house

property from Rs 2 lakhs to Rs 3.5 lakhs – this is for cost of houses

upto Rs 45 lakhs - brings down effective interest rate by almost 2%

points and will benefit affordable housing financiers

• Rs 70,000 Cr of recapitalization will be provided to PSU banks –

higher than expectations of Rs 40,000 Cr but still much less than

actual required numbers

• Evaluate FDI limit hike for insurance companies and allowance of

100% FDI permitted for insurance intermediaries

Power Sector

• Implement high powered committee's recommendation for PSDF

supported e-RLNG scheme for stressed gas plants. Positive for

Torrent Power with 1.5GW of stranded gas capacity

• Remove CSS, duties and taxes on open access and captive power.

Further improve UDAY scheme, bring a package for power sector

tariff reforms. However, no details provided.

• Considering including government stake in PSUs inclusive of stakes

held through govt. controlled entities.

9

Agriculture & Allied Businesses

Current Status Proposals Impact

Allocation to Agriculture

and Allied Activities

Increased from Rs866bn to

Rs1515bn

Positive for All Agri Players

Fertiliser subsidy at

Rs700bn

Subsidy increased by 14%

YoY from INR 700bn to

INR800bn

Increase in subsidy is

positive for the industry as

a whole. As urea subsidy

has been increased by

19% YoY to INR 536bn,

while the Nutirent based

subsidy has been

increased by 5% to INR

264bn.

Pradhan Mantri Fasal

Bima Yojana allocation at

Rs129bn (RE)

Allocation increased by 8%

to Rs140bn

Positive for agri input

sector

MNREGA outlay at

INR550bn

MNREGA outlay increased

from INR550bn to INR

600bn

Positive for agri input

companies

Interest subsidy for short

term credit to farmers at

INR150bn

Interest subsidy for short

term credit to farmers has

been increased from

INR150bn to INR180 bn

Positive for agri input

companies

Scheme for assistance to

sugar mills for the season

2018-19

Scheme for assistance to

sugar mills for the season

2018-19 from Nil to

INR10bn

Positve for sugar

companies

Increase in the public

shareholding for listed

companies

To be increased from 25%

currenctly to 35%

Negative for companies

where promoter's holding

are more than 75%.

Imposition of 20% tax on

Buy back of Shares

Imposed 20% tax on buy

back from NIL previously

Negative for the sector as

most of the agri companies

were more into buy back.

Direct Benefit Transfer

(DBT) in urea

Surprisingly no mention of

DBT

Neutral

10

Consumer Sector

• Increase in custom duty for PVC and tiles helps domestic

manufacturers as anti-dumping duty was getting over in June end.

• Excise duty on cigarettes introduced at Rs5/1000 sticks – not a big

as far as amount is concerned, sentimentally negative

• Hike in gold customs duty to 12.5%. Gold retailers and distributors

are likely to benefit from rising prices and improved pricing power.

• Increase in custom duty for palm oil and fatty acids by 7.5% - may

need price hikes of 1.5-2% for soap manufacturers.

Information Technology

• Buyback tax of 20% on listed companies – this effectively removes

tax advantage of buybacks over dividends:

• Most large IT players have all conducted buybacks in the last few

years. They may still continue to return cash possibly as dividends

(less hassle than buybacks), but will have to set aside 20% of it to

pay taxes.

• Proposal to be worked with SEBI to reduce maximum promoter

holding to 65% from the current 75% - promoters may need to sell

down stakes to comply, if the proposal goes through.

Real Estate Sector

• Further incentives to affordable housing: First time home buyers

can claim an income tax deduction of up to Rs. 1,50,000 (from Rs

50,000 earlier) on home loan interest paid for apartments with ticket

size up to Rs 45 lakhs. This deduction will be over and above the

Rs 2 lakhs limit under the Section 24 of the Income Tax Act. – Key

beneficiaries are affordable housing developers. Price of affordable

housing has been capped at INR 4.5mn.

• Rental housing: A Model tenancy law will be finalized and sent to

states. FPIs will be permitted to in REITs. RBI to get more power to

regulate housing finance companies

• For the calculation of TDS on purchase of immovable property, the

consideration shall include other charges in the nature of club

membership fee, car parking fee, electricity and water facility fee,

maintenance fee, advance fee or any other charges of similar

nature which are incidental to the purchase of immovable property -

Will increase the overall cost of house. Target of 1.95 cr houses

proposed to be built under PMAY Grameen between 2019-20 to

2021-22 has been maintained11

Oil & Gas Sector

• The FY20 subsidy remains unchanged from the interim budget Rs

375 bn entailing a shortfall of Rs 233 bn for FY20. This implies that

the high level of subsidy dues owed to the oil marketing companies

will sustain and will not go down significantly (with implications of

higher working capital and interest costs). Unless more provision is

made later in the year, there would be a perceived risk of upstream

players having to bear the subsidy as well.

• Excise duty on gasoline and diesel have been increased by

Rs2/litre - Rs 1/litre of Special Additional excise duty and road cess

of Rs 1/litre. Basically, Government has reversed the cuts made

over last 2 years (Rs2/l cut in Oct17 and Rs1.5/l cut in Oct18).

While the same should be passed on by the OMC, this leaves less

cushion with OMCs in case global crude price start moving up. The

additional excise duty is expected to generate revenue of Rs ~312

bn.

• The divestment target has been raised to Rs 1050 bn. The Budget

also mentioned about strategic sale of PSUs. Government will also

continue to do consolidation of PSU in non-financials space as well.

Budget speech mentions about Government is considering, in case

where the Undertaking is still to be retained in Government control,

to go below 51% to an appropriate level on case to case basis.

Government has also decided to modify present policy of retaining

51% Government stake to retaining 51% stake inclusive of the

stake of Government controlled institutions. This entails that FPO

and cross selling of PSU can continue.

• An import duty of Rs1/tonne on crude oil has been introduced. This

levy is nominal and has no impact.

• There have been duty changes in petrochemical products (Naphtha

and PVC) which do not have any significant impact

Roads

• NHAI allocation increased by 6% YoY growth to Rs830 bn.

• Gross Budgetary support has gone up to Rs. 720bn in FY20 from

Rs685bn in FY19 (R.E.) and Rs. 507bn Cr (actual) in FY18

• IEBR has gone up up to Rs. 750 bn in FY20 from Rs620bn in FY19

(R.E.) and Rs505.32 bn in FY18

12

Healthcare Sector

• Net healthcare expenditure allocation increased by ~15% y/y but as

a proportion of total budgeted expenditure, it remained flat at ~2.2%.

• Jan Aushadhi spending budgeted at Rs 420 mn, same as last year.

• Ayushman Bharat spending budgeted at Rs 64,000 mn, significant

increase from Rs 24,000 mn last year. The scheme was launched in

Sep’18 and hence received smaller allocation last year.

• Health and wellness centre (HWC) allocation has been increased by

~28% y/y to Rs16,000mn. Of this ~Rs13,500mn will be allocated for

Rural HWCs and remaining Rs2,500m for Urban HWCs. The

government shared its plan to open 1.5 lac HWCs at the time of

Ayushman Bharat unveiling. Till now, 8,000+ HWCs have been

opened.

• Govt. has allocated Rs 2,060 mn towards strengthening of State

drug regulatory system, which in our view will be utilized towards set

up of Price Monitoring and Research Units (PRMUs). PRMUs will

monitor and implement pricing changes in pharmaceuticals. Till now,

7 states have set up PRMUs.

Railways

• Total budget support to Indian Railways for FY20E has gone up by

23% to Rs. 680.2bn – CAPEX into New Line construction has

declined by 9% YoY to Rs. 72.6bn, Track Renewals is flat at Rs.

101.2bn, Gauge conversion is up by 10% to Rs. 22bn and Track

Doubling is up by 19% to 7bn; Significant increase (30%) in

allocation for ROB/RUBs from the interim budget has been

witnessed; including this total Investments into Indian Railways for

FY19E along with IEBR has gone up by 26% to 750.9bn.

• Total budgetary support to Metro and MRTS projects is up 19% YoY

to Rs. 177bn. CAPEX into MRTS and Metro projects is up 23% YoY

to Rs. 192bn, PMAY is up by 5% to Rs. 68.5bn, AMRUT and Smart

Cities projects are up by 14% and 5% to Rs. 73bn and Rs. 65bn

respectively. Total Budgetary allocation under the ministry is up by

12% YoY. Allocation to Smart cities mission has witnessed a decline

from interim allocation while allocation to DAY-NULM scheme has

increased.

13

Defence Sector

• Total capital outlay on Defence services is up 10% YoY to Rs. 1tn

with almost equal growth in allocation across Army, Navy and Air

force. Emphasis has been laid on purchase of Heavy & Medium

vehicles and naval dockyards with a 23% and 27% YoY growth

respectively. Allocation for purchase of Aircraft has been flat for last

3 years at Rs. 293bn. Other Equipment purchases increased by

17% YoY to Rs. 335bn.

• There has been no large change in allocation of budgets for the

roads, railways and defence sector which was envisaged in the

interim budget in February 2019. We believe capex will remain

strong in Road sector followed by railways (capital expenditure in

metro will increase).

Consumer Durables

• Increase in Custom duty on ODU (Outdoor unit) and IDU (Indoor

unit) for room ACs from 10% to 20%. This follows an increase in

customs duty on Completely Built Units (CBUs) last year from 10%

to 20%. The negative impact could be in range of 2-3% of cost

which will be absorbed by price hikes.

Cement Sector

• On Budget FY20, no meaningful changes in allocations across

construction related sectors versus what was talked about in the

interim budget.

• In Budget speech today, FM talked about construction of 1.95cr

rural houses in phase-2 of PMAY rural by FY22. This was known to

market earlier but probably by FY23 (i.e. 2022). Govt has completed

0.75cr houses in PMAY rural in FY18-19 combined versus Phase-1

target of 1cr houses. This expectation of increased allocation (i.e.

faster completion) of PMAY-rural houses isn’t reflecting in the

Budget fine print numbers

Metals Sector

• Custom duty on silver from 10% to 12.5%, marginally positive to

Hindustan Zinc (silver revenues were Rs. 2,500cr in FY19)

• Custom duty on stainless and alloy steel from 5% to 7.5% likely to

benefit alloy steel manufacturers14

Source: Axis AMC Internal Analysis, Budget Documents 2019.

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Trustee: Axis Mutual Fund Trustee Ltd.

Investment Manager: Axis Asset Management Co. Ltd. (the AMC)

The above changes to taxation is subject to presidential assent to

the finance bill 2019. The document has been prepared on the

basis on the budget documents published by the ministry of

finance and should not be used for tax planning given the

individual nature of income tax. This document represents the

views of Axis Asset Management Co. Ltd. and must not be taken

as the basis for an investment decision. Neither Axis Mutual Fund,

Axis Mutual Fund Trustee Limited nor Axis Asset Management

Company Limited, its Directors or associates shall be liable for

any damages including lost revenue or lost profits that may arise

from the use of the information contained herein. Axis Bank

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resulting from the operation of the scheme. No representation or

warranty is made as to the accuracy, completeness or fairness of

the information and opinions contained herein. The material is

prepared for general communication and should not be treated as

research report. The data used in this material is obtained by Axis

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care has been exercised while preparing this document, Axis AMC

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Mutual Fund Investments are subject to market risks, read all

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