Our musings on Union Budget 2022

By now you would have read multiple forward messages regarding highlights of the budget. For us the main highlight was that there was nothing unexpected that was announced in the Union Budget.

Let us delve on some macro figures first.

Source: Budget documents, House of Alpha Research

?Lower Growth Expectations

The budget has estimated a nominal GDP (GDP growth + inflation) of 11.1% much lower than our expectations. In a year where inflation is expected to be higher than now, it effectively estimates a low real GDP growth rate. The budget seemed to have erred on the conservative side on growth estimates, perhaps considering the impact of rising interest rates and lower liquidity.

Lower Tax Revenue Expectations

On the same lines, tax revenues are estimated to grow at single digits after an impressive 24% growth in FY2022. Tax collections have been robust in the current fiscal year, especially GST collections. If the economic growth turns out to be better than budgeted (which it conceivably can), fiscal deficit can spring a positive surprise next year.

?Funding the Fiscal Deficit

FY2022 sale of government securities to fund fiscal deficit is much lower than normal trend.

The are two factors contributing to this.

1)?????????Higher than budgeted collections from Small Savings (NSC, PPF, KVP, etc).

2)??????Swap’ of government securities (by government with RBI) that were going to be redeemed between 2022-2025 with longer term government bonds. This effectively means government has avoided a cash outflow on bond redemption and hence did not have to borrow for it. The Swap’ of government securities (by government with RBI) that were going to be redeemed between 2022-2025 with longer term government bonds. This effectively means government has avoided a cash outflow on bond redemption and hence did not have to borrow for it. The quantum of this transaction impacting FY2022 is Rs. 63,648 crores and overall Rs. 1,19,701 crores.

?Other interesting announcements:

??????Budget has proposed a tax on Digital Assets (including cryptos, NFTs etc) @ 30% on gains arising from transfer of digital assets. Transfer includes sale, gifting or lending digital assets. Also, the transferor will have to deduct tax @ 1% of value of digital assets and deposit with the government (yes, on the entire value of transaction and not just gains).

Tax on Digital Assets does not mean that India has legalised Cryptos. Tax authorities are merely trying to increase their tax avenues. This is akin to tax on gambling though the activity per se is not legal.

???????Bonus stripping in equity securities, REITs, InvITs and Alternative Investment Funds (AIF) has been disallowed w.e.f. 1st April 2023 through an amendment in Income Tax Act. Earlier the bonus stripping clause was applicable to units of mutual funds.

???????Surcharge on long-term capital gains (LTCG) on listed equity securities was restricted to 15% only irrespective of overall taxable income of the tax payer. This cap on surcharge on LTCG has now been extended to other capital assets like gold, bonds, unlisted equity, etc. Before this proposed amendment, such surcharge could be as high as 37% depending on the tax slabs. This is particularly positive for investors in start-ups.

?Overall it was a tepid budget. Anyone who expected big-bang announcements were surely disappointed