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Budget 2020: Tax exemption for sovereign wealth funds to boost infrastructure

Budget 2020 India, Budget 2020-21

By Nimesh Shah

Budget 2020 India: The Union Budget for FY21 is a pro-middle class one since it aims to boost the personal disposable income in the hands of middle class and those having lower incomes through an alternate personal tax regime. This will increase the discretionary demand. The abolition of Dividend Distribution Tax (DDT) is an important structural change which will benefit foreign investors and small shareholders in India.

Thus far, individuals with lower income whose ability to save was minimal were placed at a higher tax level when compared to individuals with higher ability to save. This anomaly has been addressed through the new personal income tax slabs. Similarly, even in case of DDT, rationalisation has occurred. Earlier, DDT was the same for individuals at the lowest and the highest tax bracket, but now that inequity has been removed. We believe both these measures are a very healthy development.

The steps taken by the government to encourage sovereign wealth funds to invest in Indian infrastructure is positive. It could be a path-breaking step given the quantum of funds globally, which are currently yielding zero to negative interest rates. So, the infra theme has become attractive for a patient long-term investor.

In September 2019, the finance minister had announced a major step towards economic reforms through corporate tax rate cuts. This step was primarily aimed at reviving the capital expenditure and private investment. The sentiment element had drastically improved following the event. Since then, Indian equity markets continued to trade higher and remain elevated. Post the Union Budget 2020 announcement, the markets corrected. We are of the view that the correction seen in the market was almost certain.

Watch Video: What is Union Budget of India?

Most of the global markets had seen correction on account of the outbreak of coronavirus in China and the subsequent spread of the disease in many other countries. However, Indian markets showed resilience and as a result valuations of mega-caps were largely stretched. Our in-house equity valuation index indicated that equities were not undervalued. Globally, 2019 was a year when the central banks ensured that the markets did well by bringing down rates, despite the economy being under pressure. Going forward, we believe that equity markets will remain volatile on account of elevated global equity valuations coupled with geopolitical developments.

For a mutual fund investor

For an MF investor, we recommend focusing on asset allocation, doing long- term SIPs through goal based investing and investing in accrual debt funds especially credit funds and moderate duration funds. We believe that accrual has the potential to emerge as an interesting investment pocket over the next three years despite the negative news flow in this space over the last year. Currently, accrual carries sufficient margin of safety. Smallcaps is another area which is attractive but one needs to have an investment horizon of at least five years plus.