Why did the market go euphoric over Budget?

Budget 2022 was historic in many ways as mentioned by the Finance Minister at the start of her speech given that it came in the backdrop of the Covid pandemic.

At this time, when the economy is limping back to normalcy and the government treasury is stressed, the Budget was expected to play a critical role that, while creating an impetus in economy, did not burden the tax-paying community. But the expectation of a cess was riding high.

As the Budget speech unfolded, the markets saw an almost unprecedented upward rise. The three significant stock indices closed the day with huge gains: Sensex by 5 per cent, Nifty by 4.74 per cent and the Bank Nifty by 8.26 per cent. So, what was the trigger in the Budget for the stock markets to have had such a surge on Budget and thereafter?

No Covid tax

Despite anticipation of a Covid cess, the tax rates were kept unchanged. Thus, no negative impact from a tax-payer’s perspective led to the immediate rush of positive sentiment for the stock markets. It also indicated the country’s stable and consistent tax policy to Indian corporates and global investors.

Disinvestment plan

The announcement to privatise two public sector banks (other than IDBI Bank), one general insurance company and completion of disinvestment in BPCL, Air India, Shipping Corporation of India, Container Corporation of India, BEML, Pawan Hans, Neelachal ISPAT Nigam Ltd within FY 22 demonstrates an underlying intent to maintain a positive capital market position.

This arises from the fact that, for the government to achieve robust valuations for successful divestments, other comparable players need to reflect a positive growth. The announcement of bringing the IPO of LIC during 2021-22 was another plus for the market.

Bad bank proposal

The last few years have been stressful for the financial sector. Given the alarming NPA situation in PSU banks, the announcement of an Asset Reconstruction Company and Asset Management Company is a step in the right direction.

The need is now for the government to ensure an effective process to consolidate and take over the existing stressed debt/assets and then to dispose-of them to Alternate Investment Funds and other potential investors for eventual value realisation. This initiative spurred the rise in the Bank Nifty.

The Budget had other key proposals for select sectors of the economy. While the Vehicles Scrappage Policy is an encouraging announcement for the automotive industry, the exemptions to aircraft leasing companies operating from a unit in the International Financial Services Centre (IFSC) will similarly impact the aircraft operating companies. Equally encouraging was the proposed scheme for providing subsidy to Indian shipping companies participating in global tenders floated by the Ministries and CPSEs.

In a boost for foreign investors, Section 196D is to be amended by the introduction of a proviso, whereby, in case of FIIs providing a Tax Residency Certificate (TRC), withholding from payments received by them will be restricted to the beneficial rate, if any, available under the Double Tax Avoidance Agreements (DTAA). Payments made to FIIs are currently subject to a withholding tax at the rate of 20 per cent, irrespective of any beneficial rate applicable under the DTAA.

Towards transparent taxation

Some of the important tax initiatives of this Budget are:

Reduction in the time period for commencement of re-assessment from 6 years to 3 years in normal case;

Faceless proceedings before the ITAT;

Reduction in time limit for completing assessments to 9 months from the current 12 months;

Replacement of the non-operational AARs with the Board of Advance Ruling; and

Discontinuation of statutory audits under GST.

The Budget has also modified Custom duty rates to achieve the following objectives:

Promotion of local production capacity to discourage imports — chemicals, cut and polish gemstones, safety glasses, etc.

Pushing manufacturers to onshore value-addition processes within the country through fresh levy/hike in import duty: for instance, solar inverters, parts of mobile phones, compressors for refrigerators/ACs, etc.

Addressing inverted duty structure tariffs through the rationalisation of Custom Duty rates on textiles, ferrous and non-ferrous metals, and naphtha.

Introducing an agri-cess to ensure that the overall duty load remains unchanged on importers;

AResolving to nnouncement to the revisit 400 existing exemptions, to be taken up after due consultation with trade and industry.

One would agree that tough times called for tougher decisions. The Finance Minister has, by playing a balancing act of placing reliance on the expected growth trajectory and reaching for external borrowings, indeed presented a “never before” Budget in these trying circumstances.

No wonder the markets reacted the way they reacted.

The writer is Partner, Economic Laws Practice

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