Tough times call for tough measures. We run through the intent of decisions and the impact the Union Budget 2020 will have on taxpayers and the economy
Bengaluru: "It was the best of the times, it was the worst of the times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was winter of despair...." thus goes the famous opening lines of "A Tale of Two Cities" by Charles Dickens.
The 2020-21 Budget presented on Saturday by Indian Finance Minister Nirmala Sitharaman can well be summed up in those lines. The Indian stock markets viewed it through highly pessimistic lens and felt it as "worst of times," "season of Darkness" and "winter of despair" as the Bombay Stock Exchange Sensitive Index (Sensex) tanked a good almost a shade under a 1000 points. The markets may well digest the finer points and may be able to look it at as the season of light and the spring of hope in the near future.
After hinting at multiple earlier discussions that citizens' wallets will be better off after the new Budget, Mrs Sitharaman indeed delivered the best. But it was a googly and that too a sharp one.
Income tax has always been the most contentious part of the Union Budget as it pertains to each one of us who are earning.
This year, the expectations around relief in the form of rate cuts have resulted in revised tax slabs classified now as Section 115BAC. But they come with a catch. Those availing the new tax slabs will not be able to claim as many as 70 of the 100 exemptions that were allowed in the earlier tax regime, including the popular 80C investments.
The scrapping of deductions is also the reason why the government has made this a unique measure — it is optional. We may choose to either go with the new regime without exemptions or the old one with it.
For example, if we earn Rs 15 lakh, we would be required to pay Rs 1,95,000 as income tax, compared to the earlier regime’s Rs 2,73,000.
There is also a choice for us to follow the old regime of tax rate with exemptions.
The exemptions were done away with in order to simplify the tax-filing process so we don’t have to take the help of advisers, according to the Finance Minister. The move is also in line with this government’s stated intent of reducing tax rates while removing tax exemptions.
Of course, the reduction is expected to lead to a growth in private consumption, which wallowing at 5.8% growth, is in dire need of a boost for the sake of the economy.
The personal tax reduction will cost the government Rs 40,000 crore in revenue. The salaried segment brings in close to 60% of the gross total income from individuals including those earning from business, capital gains, property and other sources.
The stocks of insurance providers and housing loan providers have taken a hit as the personal tax exemptions are made optional. The deductions under 80C and on housing loans used to play a considerable part in their appeal to the tax-payer. Many of us would go for multiple insurance products to seek exemptions in a fiscal or opt for a home loan even if we could pay in cash for a home. It remains to be seen how the public offer of LIC will be viewed in the near future as it is being touted as the much awaited public offer in the near future.
The absence of sops for the realty sector, suffering from sluggish demand has disappointed the street. The only concession is the exemption of builders’ income tax.
The highly contentious fiscal deficit guidance has been revised to 3.8% of GDP for FY 2019-20 from 3.42% earlier. The earlier target of 3.42% has already been breached to 132% of the target. After giving up a good Rs 1.4 lakh crore through reducing corporate tax during late 2019, and spending her way out of a economic slowdown, it will be indeed a tough task for the Indian economy to manage to stem the fiscal deficit at reasonable levels, which is expected to be in the range of 3.5% of GDP. But many will certainly argue that tough times call for tough measures and that is the exact path that Mrs Sitharaman is taking in leading from the front.
In order to generate revenue, the government has planned to sell the remaining stake in IDBI Bank. The finance minister has set herself a unwieldy target through the divestment process, coming after falling short of the earlier targets as well. It is high time indeed that the divestment / privatisation process take off on time and let government focus on creating policies and framework.
The government has also proposed partial sale of stake in LIC via Initial Public Offer. The fiscal deficit has been brought down from 4.1% of GDP in 2014 to 3.42% of GDP in 2019. Indian economy stumped with slow growth and high inflation has certainly added to the fiscal deficit.
For the FY 2020-21, the government has pegged the fiscal deficit target to 3.5% of GDP. Capital Expenditure for FY 20-21 is estimated at Rs 30.42 lakh crore, while the receipts are estimated at 22.46 lakh crores. Keeping the fiscal deficit in check will be very tough for the government as the income tax rates are slashed and will result in the lower collection of direct tax.
The proposed stake sale of LIC and IDBI Bank and the impending sale of BPCL can help generate some income for the government. However, given the current situation of the economy, a rise in fiscal deficit number should be gladly accepted by the investors as this spending will lead to a revival of the economy unless they are spent on non-productive purposes.
Overall, all the positives have been discounted in the market and at the same time, it will not be surprising if the government decides to not tweak all the taxes at the same time and instead decides to go with one rate cut at one time.
The markets were also cross with India's FM as she did not relent on the much anticipated aspect of Long Term Capital Gain Tax.
The FM has decided to not do away with LTCG tax. The modification of tenure defined under LTCG was also on the cards. The 30% tax on a gain of the sale of any real estate has also not been scrapped which was also expected.
Not removing the LTCG tax should not come as a surprise to investors. The fiscal deficit is already widening and scraping of LTCG tax would have led to more widening of the deficit.
Long term capital gain tax was abolished in 2005 in order to attract more investment in capital assets. But again in Budget 2018 it was reintroduced at the rate of 10% on any capital gain of Rs 1,00,000 or more where holding period is more than one year. Since then it has been a roller coaster ride for the market participants, be it a domestic investor or FII (Foreign Institutional Investor). LTCG on real estate is imposed at 30% on any gain on the sale of the property if the gain is not invested in real estate within three years.
An another aspect which will be debated is that of the spin the Indian finance minister has provided with regard to Dividend Distribution Tax even as it has been decided to do away with DDT. It is the tax paid by the company before distributing any dividends to its shareholders.
But there is a catch. Now the party receiving the dividend is liable to DDT. The rate of DDT was 20.35% (including cess and applicable surcharge). Through DDT the govt has collected Rs 41,000 crore each in the year of 2016-17 and 2017-18. Rs 25000 crore of revenue would be foregone with the abolition of DDT.
With DDT being scraped the government has to cover up the revenue foregone through other sources.
FM says a stable and predictable business environment is key for the government. Contracts Act will be strengthened to ensure that all contracts are honored, says Nirmala Sitharaman.
Nirmala Sitharaman said that there is a need to reduce direct tax litigation. A total of 4.83 direct tax cases pending in various forums. So a new direct tax dispute settlement under ‘Vivad se Vishwaas Scheme’ will be launched.
No penalty will be charged if taxpayers pay by March 31, 2020. Here, only the disputed tax amount has to be paid.
The finance minister enunciated the need for liberalising the farm market to ensure farmers received the rightful income and the need to remove distortions from it. After all, it accounts for 18% of the GDP of India.
With a 16-point plan, the Budget 2020 hopes to work on a holistic improvement for the farm sector — production, purchasing, marketing, logistics, livestock, apiary and fishery, alternate non-crop income for the off-season, and technology integration. The aim is to double farm income by 2022.
One of the key challenges has always been access to credit in rural India, at times taking a toll on its consumption. The budget nudges NBFCs, cooperative banks and Nabard to provide quick, easy and affordable credit/finance to the farmers as a sum of Rs 15 lakh-crore in agri-credit would be made available.
Both the Indian Railways and civil aviation ministry would be roped in to facilitate logistics of perishable goods so farmers don’t suffer income-loss due to delays and spoilt produce.
The ambitious National Infrastructure Pipeline (NIP) with an allocation of Rs 103 lakh-crore will modernise logistics, road and other transport networks, overhaul housing, provide potable water, and focus on green energy.
The NIP is expected to drive investments, job-creation and act as a key growth booster, for the government is in a race to make India a $5-trillion economy by 2024-25, and is working against a slowdown.
The FM said, “The NIP will improve the ease of living for every citizen, there is a huge employment opportunity in construction, operation, and maintenance of projects.”
There is an additional Rs 1.7 lakh-crore for the transport sector next fiscal.
The government has planned to spend, between 2020 and 2025, nearly 70% of its capital expenditure on sectors such as energy (24%), roads (19%), urban development (16%), and railways (13%).
Last Updated 1:56 PM IST