New Delhi: On February 1, 2018, Finance Minister Arun Jaitley will present Union Budget 2018-19. The Budget for 2018-19 is significant for the Narendra Modi government as it would be the first Budget post the implementation of the Goods and Services Tax (GST) regime. Since it would also be the last Budget before the 2019 Lok Sabha elections, the BJP-led NDA government is expected to announce some populist schemes to woo voters.
In view of the above, the Union Budget 2018-19 may be a right mix of populism and reforms. Here is what the banking and telecom sectors can expect from the Finance Minister's forthcoming Budget.
The banking sector has seen a flurry of activity in the past few months, firstly with the issue of NPAs, demonetisation, GST and finally with the recapitalisation of banks. All these issues are likely to have a substantial impact on the Union Budget 2018. It is expected that the FM will have a special focus on the banking and the financial sector in the Budget 2018-19.
Among the major issues which the FM is expected to address is the recapitalisation of the banks. It is to be noted that the Centre had first announced it in October 2017 and then recently detailed the nature of the recapitalization plan of 2.11 lakh crore for Public Sector Banks (PSBs). Around 20 PSBs will be recapitalized with Government infusing capital to improve overall health and functioning of these PSBs. This holds significance since the surge in bad loans, recovery of non-performing assets (NPAs), Asset Quality Deterioration etc are the biggest challenges in the banking sector, which affect the banking stability indicator (BSI). Due to rising bad loans and NPAs, the PSBs are now extra vigilant about lending which is resulting in Low Credit Offtake. The capital provided by the Centre can thus be utilised by the PSBs to tide over bad debts and to revive credit growth.
Taxation on FD
In view of Indians' love for fixed deposits (FD), which is considered a safe and reliable investment, the banking sector wants the Government to bring the taxation on FD returns at par with that of debt mutual funds. Currently, the fixed deposits are highly tax-inefficient. For example, if anyone falls in the 30 percent tax bracket, a 7 percent FD will actually earn him 4.9 percent, which wouldn’t beat inflation or help in wealth creation. Therefore, the industry has proposed to bring the taxation on FD returns at par with debt mutual funds, wherein an investor is taxed only upon redemption and if redemption is after three years, the tax is calculated on the Long Term Capital Gains at 20.6 percent with indexation benefits, which significantly reduces tax outgo.
Increasing TDS Limit
Another major demand of the banking sector is to increase the TDS limit for bank interest from the current Rs 10,000. Tax sops or subsidy on home loans for first time home buyers to purchase affordable housing is another step that can help banks shore up customers.
FDI in Private & PSU Banks
The government may also allow 100 percent FDI in private banks (currently, up to 49 percent is allowed without government’s permission and up to 74 percent with approval) and 49 percent in PSU banks (presently 20 percent). This will infuse efficiency in PSBs and they will be able to compete with private sector banks more efficiently. It will also reduce the pressure on the Government to make available funds for recapitalisation.
Limit on Affordable Housing
Union Budget 2018-19 is expected to increase the fund limits on affordable housing or increase subsidy provided on interest rates for borrowers. The Union Budget is also likely to focus on improving credit inflow to MSME (Micro, Small & Medium Enterprises). The government is expected to increase the allocation for Pradhan Mantri Mudra Yojana. This will help financial inclusion into the country aiding the MSMEs to finance their business needs and banks and NBFC’s to improve their credit offtake. Hence, it is expected that the Budget will raise the credit offtake for affordable housing, which will be in-line with the NDA government’s agenda of ‘Housing for All’.
Also, in order to give a boost to affordable housing, the government might announce steps to make land acquisition easier.
The banking sector also wants the government to incentivize digitalisation. Further, recognition of e-KYC and e-Signature can also go a long way in boosting financial inclusion and enhancing productivity. Since paperless onboarding via usage of e-Sign, e-KYC via OTP and e-NACH has tremendous reach and cost benefits of instant account opening via the mobile, the banking sector expects the Centre to announce measures to push digitalization.
The Unified Payments Interface (UPI) – an instant real-time payment system developed by National Payments Corporation of India facilitating inter-bank transactions – is seen by the industry as a better alternative to POS machines. In the near future, a vast majority of Indians will be connected to the internet via smartphones. It would, therefore, be prudent to push UPI harder since it is highly scalable, cheaper than POS, and requires lesser maintenance.
In the upcoming Union Budget, the telecom sector is eagerly waiting for some breather given the fact that the year 2017 has been a year of consolidation and rapid decline in profit margins. The drastic fall in profit, piling up of debt, growing competition and near extinction of several mid-size operators was all attributed to the ‘Jio Effect’ following the entry of Mukesh Ambani-led Reliance Group in the Telecom sector. The launch of 'Jio' forced big telecom giants to consolidate like never before - leaving just three major players in the market by the end of the year 2017.
Despite increasing demand for newer services like 4G and 4G VoLTE, the debt-ridden telecom sector continues to be under extreme stress. So, the expectations are naturally high that FM Jaitley will announce some tax exemptions to the telecom industry in Union Budget 2018. The Modi government is also believed to have finalised a relief package for the telecom sector, which includes the proposal to give more time to telcos to make spectrum payments.
These measures are based on the recommendation of an inter-ministerial committee and are expected to materialise by early 2018 along with a new National Telecom Policy. The Cellular Operators Association of India (COAI) has called for a reduction in GST applicable on telecom service and dropping the tax withholding rate to 1 percent over the discount that telecom companies provide to distributors for the sale of prepaid SIM cards.
The telecom industry shells out close to 30 percent of its earnings in taxes and levies annually. Consequently, telcos are finding it “increasingly difficult” to invest in new-age technologies like 5G, IoT, virtual reality, etc, which are believed to drive the next phase of growth in mobile.
The government needs to look at telecom slightly differently. Presently, telecom falls under the 18 percent GST slab. Another industry-watcher, however, rules out the possibility of any “big bang” tax revisions in telecom.
The Department of Telecom (DoT) is believed to be working on a proposal to allow 100 percent FDI for telecom services through the automatic route. If adopted, this will allow companies to attract foreign funds without the DoT's approval. At present, 100 percent FDI is allowed, of which, up to 49 percent investment in a company can be done through the automatic route.
Reduction in Licence Fee, Spectrum Charges
While the government has sought to provide some relief to the telecom sector in the form of increased spectrum cap and 100 percent FDI, it needs to further lower the debt burden on the industry. According to the telecom industry veterans, the effective way of doing this is by bringing down both licence fees and spectrum usage charges.
At present, telcos pay about 8 percent of their adjusted gross revenue (AGR) as a licence fee, and another 3 percent as spectrum usage charges (SUC). These are the government’s two avenues to earn from the telecom industry.
Mergers & Acquisitions policy
The telecom sector has seen heightened mergers and acquisitions (M&A) in the last 18 months. The biggest was the merger of Vodafone and Idea, which is likely to be completed in March. The Vodafone-Idea merger will create India’s largest telecom network with over 400 million subscribers base, pushing current market leader Sunil Bharti Mittal-led Airtel down to the second spot.
Towards the end of 2017, Reliance Jio announced the acquisition of Reliance Communications’ wireless business, while the latter decided to down the shutters on its voice operations. Additionally, Airtel and Tata Teleservices also merged their consumer businesses. Experts believed that a streamlined M&A policy will “play a critical role in alleviating the financial stress on the sector”.