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Budget 'mildly supportive of growth', focuses on hinterland

The Budget focuses on the hinterland more and is only "mildly" supportive of growth that may touch 7.4 per cent in 2017-18, says a Crisil analysis.

"We expect a gradual pick up in GDP growth to 7.4 per cent from 7 per cent in 2017-18 as investment cycle is expected to remain weak and consumption demand will likely pick up only moderately despite reduction in tax rates and softer interest rates," it said in a post-Budget note on Thursday.

The key focus of the budget is to revive the rural sector by bolstering agriculture and infrastructure. Jaitley has performed a "balancing act" by refraining from stretching fiscal coffers to give a steroidal push to the economy, it said, commending the "prudence over populism" in restricting the fiscal gap to 3.2 per cent.

It said the fiscal math is "broadly credible" even though the targets on divestment and GST implementation may "cause hiccups" and any shortfall in stake sales alone will pose a threat of 0.10 per cent slip-up in this. Commenting on the drawbacks, it said the one big miss in the Budget is the lack of a roadmap to resolve banking sector's asset quality and recapitalisation woes. The target to reduce borrowings to Rs 3.48 trillion is a positive for the bond markets. Concessional tax rates for external commercial borrowings and capital gain benefits for masala bonds will support overseas fundraising.

Elaborating on its growth impact analysis, the note said the push to consumption will only be "mild" because of the measures undertaken and the factors to look out for are the monsoons, softer rates and inflation.

On investments, it said the overall situation will improve only in fiscal 2019 and not the next fiscal. The 0.2 per cent additional space on the fiscal deficit front–under earlier FRBM Act,government was committed to narrow the gap to 3 per cent–will make additional Rs 33,700 crore of funds available for spending. The 3.2 per cent deficit number the government has accounted for initial disruptions on account of GST and the lack of revenue from sources like petroleum excise and spectrum revenues, it said.

To achieve 3 per cent fiscal deficit–targeted for 2018-19–will require measures to improve the tax net. On the rural economy front, it said reviving fortunes in the hinterland by bolstering the agricultural economy and rural infrastructure seems to be the primary motivation of the Budget announcements, adding this is necessary given the fact that these pockets suffered the most during the note-ban.

Conversion of preference shares into equity exempted from tax

In a big relief to private equity and venture capital firms who prefer buying convertible preference share, the government has exempted conversion of preference shares into equity from capital gain tax.

Earlier, the conversion of preference shares into equity was considered a transfer and thus attracted capital gains tax.

Most of the private equity firms prefer to make investments in the form of convertible preference shares.

Earlier, there was a doubt if conversion of preference shares into equity was going to be taxed or not.

IVCA President Rajat Tandon said that VC/PEs often invest through cumulative convertible preference shares (CCPS). Now, CCPS, when converted, will be completely tax efficient and indexed from the date of issue and not from the date of conversion for long-term capital gain purposes.

"In order to provide tax neutrality to the conversion of preference share of a company into equity share of that company, it is proposed to amend section 47 to provide that the conversion of preference share of a company into its equity share shall not be regarded as transfer," said the memorandum to the Finance Bill 2017.

The move is aimed at boosting investments in startups.

Under the existing provisions of the Act, conversion of security from one form to another is regarded as transfer for the purpose of levy of capital gains tax. However, tax neutrality to the conversion of bond or debenture of a company to share or debenture of that company is provided under the section 47.

Meanwhile, with the Budget proposing to withdraw long-term capital gains tax exemption if shares were purchased without paying STT, venture capital and private equity investors want clarity from the government to keep their investment in unlisted firms and the ESOPs exempted.

While the new provision is mainly aimed at checking misuse of this exemption for tax evasion through 'sham transactions' in stock market, it also provides for continued exemption for "genuine cases" where STT could not have been paid like in acquisition of shares in IPOs, FPOs, bonus or rights issue of shares by listed firms by non residents.
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