Vijay Kumar Gaba: Union Budget FY21 - A caged canary aspiring to fly high

Union Budget FY21 - A caged canary aspiring to fly high

The Finance Minister read out the longest ever budget speech. By the end of it she was too exhausted to even complete the speech. This pretty much explains the state of affairs.

Like a caged canary aspiring to fly in the blue sky, the finance minister very enthusiastically read out the vision for new modern India. However, after two hours of aspirational efforts, it was evidently clear that she does not have enough strength to break the shackles and release herself. In the end, she was settled in the cage, totally exhausted and her wings ruffled.

The positive take away from the budget statement is that the aspirations are really high and the vision of new modern India very clear. The government for the first time made an unambiguous admission that the way forward is a progressive socio-economic structure that is egalitarian but encourages and supports private enterprise. It is a major achievement to officially abandon the socialist legacy that focused on curbing demand rather than enhancing supply and hindered the seamless integration of Indian economy in the global economy.

Positive take away

The following thoughts in budget speech indicate that some significant structural reforms could be implemented in next few years. These reforms with stabilization of the already implemented changes like GST, IBC, simplified corporate tax structure, etc could help in propelling the growth to the desired level:

Private participation in LIC, Railways, & Public Sector Banks;
Corporate farming through long term leases to improve productivity and profitability of farm sector;
A comprehensive vision for Integrated rural development;
Healthcare in PPP mode;
Admitting commercialization needed in education and training sector, and permitting FDI and ECBs; admission that education in humanities stream is mostly unproductive; and allowing online degree courses;
Exploitation of idle farm and railway land for solar energy production;
Unleashing power sector to grow like the telecom sector did in past 15years - prepaid metering and portability of service provider;
Acknowledging the needs of modern businesses and society - local data storage, investment in modern technologies likes analytics, machine learning, robotics, bio-informatics and Artificial Intelligence, ensuring high quality standards; world class logistics, etc.;
Focusing on the strengths of India - iconic heritage centers; preparing teachers and healthcare workers for the global communities; preparing Indian universities for global students;
Increasing the age of marriage and motherhood for women

Negative take away

The incongruence between the intent (Part 1) and action (Part 2) is the key negative in the budget. For example consider the following:

It seems that the government has decided to come out openly in favor of US, in the global trade war. The changes in duties on consumer items imported mostly from China clearly indicate a political motive, besides an economic one.
The tax structure for individual tax payers has been made more complicated, contrary to the promise of simplification. Understanding the new tax regime for individual and HUF tax payers would need help of even more qualified professional then before, contrary to the statement made by finance minister.
It's the sixth straight budget that talks about eliminating tax terrorism. The finance ministers admit year after year that tax terrorism is a realty and it is hindering growth. So far there is little delivery on the promise of eliminating this undue harassment of tax payers. Rather each new promise further erodes the credibility of the government.
The allocation of resources to the critical sectors like health, education, rural development is not commensurate with the statement of intent made in first part of the budget speech.
The reluctance to temporarily suspend FRBM application is perplexing. The resource constraint is too conspicuous. The benefits of additional spending on reforms agenda are all well defined. The benefits of violating FRBM targets, if the reform agenda as outlines in Economic Survey and Budget speech is religiously implemented, would outweigh the cost in the short term.
The economy wanted more money in consumers' hand. The method minister has chosen to discourage savings by opting the new personal tax rate structure. This may not be the best way of promoting consumption.
The removal of dividend distribution tax shall result in materially higher taxation for the investors. This is contrary to the intent.

Key promise

Through the budget, the finance minister has made two key promises. Delivery on these two must be closely watched

1. The government shall aim:

To achieveseamless delivery of services through Digital governance
To improve physical quality of life through National Infrastructure Pipeline
Risk mitigation through Disaster Resilience
Social security through Pension and Insurance penetration.

2. The government shall carry out a fundamental overhaul of Centrally Sponsored Schemes and Central Sector Schemes to align them with emerging social and economic needs of tomorrow, and to ensure that scarce public resources are spent optimally.

Comprehensive agenda for integrated rural development

1. Encourage State governments to undertake implementation of following model laws already issued by the Central government:

Agricultural Land Leasing Act, 2016
Agricultural Produce & Livestock Marketing (Promotion and Facilitation) Act, 2017
Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act, 2018

2. Comprehensive measures for one hundred water stressed districts.

3. Scheme to provide money to 20 lakh farmers for setting up stand-alone solar pumps; help to another 15 lakh farmers solarise their grid-connected pump sets; and a scheme to enable farmers to set up solar power generation capacity on their fallow/barren lands and to sell it to the grid would be operationalized.

4. Encourage balanced use of all kinds of fertilizers including the traditional organic and other innovative fertilizers to change the prevailing incentive regime, which encourages excessive use of chemical fertilisers.

5. Creating warehousing, in line with Warehouse Development and Regulatory Authority (WDRA) norms. Provide Viability Gap Funding for setting up such efficient warehouses at the block/taluk level.

6. Village Storage scheme to be run by the SHGs. This will provide farmers a good holding capacity and reduce their logistics cost.

7. Build a seamless national cold supply chain for perishables, inclusive of milk, meat and fish, the Indian Railways tol set up a “Kisan Rail” – through PPP arrangements. Put refrigerated coaches in Express and Freight trains as well.

8. KrishiUdaan to launched by the Ministry of Civil Aviation on international and national routes for transporting perishable produce to help improve value realisation especially in North-East and tribal districts.

9. For better marketing and export of horticulture produce, support States that adopt a cluster basis approach with focus on “one product one district”.

10. Expand integrated farming systems in rainfed areas. Add multi-tier cropping, bee-keeping, solar pumps, solar energy production in non-cropping season will be added. Zero-BudgetNatural Farming (mentioned in July 2019 budget) shall also be included. The portal on “jaivikkheti” – online national organic products market will also be strengthened.

11. Financing on Negotiable Warehousing Receipts (e-NWR) to be integrated with e-NAM.

12. NABARD re-finance scheme to be further expanded for NBFCs and cooperatives. All eligible beneficiaries of PM-KISAN to be covered under the Kissan Credit Card (KCC) scheme.

13. Eliminate Foot and Mouth disease, brucellosis and PPR by 2025. MNREGS to be dovetailed to develop fodder farms to facilitate doubling of milk processing capacity by 2025.

14. Framework for development, management and conservation of marine fishery resources.

15. Raise fish production, promote growing of algae, sea-weed and cage culture to create employment in coastal areas.

16. Further expand on SHGs.

Laying foundation for modern India

1. Policy to enable private sector to build Data Centre parks throughout the country to enable domestic businesses to skill fully incorporate data in every step of their value chains.

2. Fibre to the Home (FTTH) connections through Bharatnet to link 100,000 gram panchayats this year.

3. A digital platform to facilitate seamless application and capture of IPRs. An Institute of Excellence, to established to work on the complexity and innovation in the field of Intellectual Property.

4. Knowledge Translation Clusters would be set up across different technology sectors including new and emerging areas.

5. Establish facilities for designing, fabrication and validation of proof of concept, and further scaling up Technology Clusters, harboring such test beds and small scale manufacturing.

6. Initiate two new national level Science Schemes, to create a comprehensive database to map of India’s genetic landscape considered critical for next generation medicine, agriculture and for bio-diversity management.

7. To provide early life funding, including a seed fund to support ideation and development of early stage Start-ups.

8. To establish National Mission on Quantum Technologies and Applications to open up new frontiers in computing, communications, cyber security with wide-spread applications.

Focus on strengths

1 150 higher educational institutions to start apprenticeship embedded degree/diploma courses by March 2021.

2. “Study in India” programme to get boost with Ind-SAT (qualifying test) to be held in Asian and African countries.

3. Special training to teachers, nurses, para-medical staff and care-givers for employment abroad.

4. Centralized Investment Clearance Cell to provide “end to end” facilitation and support, including pre-investment advisory, information related to land banks and facilitate clearances at Centre and State level to new entrepreneurs.

5. Schemes to harness solar power and maritime resources.

6. To establish an Indian Institute of Heritage and Conservation under Ministry of Culture.

7. Five archaeological sites to be developed as iconic sites with on-site Museums.

Financial markets

1. Certain specified categories of Government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well.

2. The limit for FPI in corporate bonds, currently at 9% of outstanding stock, will be increased to 15% of the outstanding stock of corporate bonds.

3. To improve investors’ confidence and to expand the scope of credit default swaps, a legislation to be enacted for laying down a mechanism for netting of financial contracts.

4. Proposal to expand CPSE debt ETF scheme to a new G-Sec Debt-ETF. This will give retail investors access to government securities as much as giving an attractive investment for pension funds and long-term investors.

5. Partial Credit Guarantee scheme for the NBFCs to be expanded whereby the Government will offer support by guaranteeing securities so floated.

6. Rs22,0bn provided to Infrastructure Pipeline as equity support to Infrastructure Finance Companies such as IIFCL and a subsidiary of NIIF. They would leverage it, as permissible, to create financing pipeline of more than `1,00,000crore. This would create a major source of long term debt for infrastructure projects and fulfill a long awaited requirement.

7. GIFT IFSC has an approved Free Trade zone for housing vaults. It already has 19 insurance entities, 40 banking entities. It has also provided for setting up of precious metals testing laboratories and refining facilities. With the approval of the regulator, GIFT City would set up an International Bullion exchange(s) in GIFT-IFSC as an additional option for trade by global market participants.

8. Proposal to sell a part of its holding in LIC by way of Initial Public Offer (IPO).

Key estimates

Tax proposals

Personal income tax

No change in rate of taxation for individuals and HUF.
Dividend income now taxable as income from other sources at the marginal rate of taxation. If the amount of dividend from one source is higher than Rs5000, the paying entity will deduct at source (TDS) u/s194 at applicable rate.

(Note: As per the Finance Bill, the capital gain on redemption of Mutual Fund Units is also subject to TDS. However, it does not seem to be the intent of the statute, and may be clarified later)

Tax to be collected at source (TCS) in case of remittances by individual under Liberalized Remittance Scheme (LRS) of RBI. TCS will be @5% in case of remitter submitting PAN and Aadhar; otherwise it will be @10%.
Tax to be collected at source (TCS) in case of payment to a tour operator for travelling abroad. TCS will be @5% in case of remitter submitting PAN and Aadhar; otherwise it will be @10%.
To be categorized a non-resident, an Indian now will be required to stay abroad for 245 days, against 182 previously.
A non-resident Indian, who is not taxed in any foreign jurisdiction, will become taxable in India for his entire global income.
NRI whose total income consists of only dividend, interest and fee for technical services need not file return provided full TDS has been deducted from such income.
Employees of Start Ups may pay tax on perquisite value of ESOP within 14 days of expiry of 48month from vesting, or date of sale of shares by them or the assessee ceasing to be the employee of start up, whichever is earlier.
The aggregate exempted contribution to NPS, Pension (superannuation) Fund, and Recognized Provident Fund for an employee restricted to Rs7,50,000 per year. Any contribution above this amount and interest/dividend on such excess shall be taxable as perquisite.

New option tax rate structure for individuals and HUF

The finance bill proposes changes in personal tax structure by introducing an option to choose a "lower tax rate without exemptions" regime. However, the rules proposed for opting the new regime are so complicated that only a handful of individuals might be able to opt for it.

As per the new rules an individual or HUF may opt for the following tax rate structure:

This is subject to the following conditions:

1. Assessee having business income opting for the new structure shall have to follow the new structure, till the business income continues.

2. Assessee not having business income may choose between the old and new structure every year before filing the return.

3. Assessee opting for taxation under the new scheme shall not be entitled to the following exemptions/ deductions:

Leave travel concession as contained in clause (5) of section 10;
House rent allowance as contained in clause (13A) of section 10;
Some of the allowance as contained in clause (14) of section 10;
Allowances to MPs/MLAs as contained in clause (17) of section 10;
Allowance for income of minor as contained in clause (32) of section 10;
Exemption for SEZ unit contained in section 10AA;
Standard deduction, deduction for entertainment allowance and employment/ professional tax as contained in section 16;
Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);
Additional deprecation under clause (iia) of sub-section (1) of section 32;
Deductions under section 32AD, 33AB, 33ABA;
Various deduction for donation for or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35;
Deduction under section 35AD or section 35CCC;
Deduction from family pension under clause (iia) of section 57;
Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc).

However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

Dividend Distribution Tax

Section 115-O providing for dividend distribution tax (DDT) @15% plus applicable surcharge omitted.
Dividend to be taxable in the hands of recipients at the marginal rate of taxation.
In case of corporate recipients, the dividend received not taxable to the extent it is distributed to the shareholders of the recipient company latest by one month before filing the IT return for the financial year to which the dividend relates.
In case the amount of dividend exceeds Rs5000 the paying entity shall deduct TDS @10%.

Other

Exemption to Sovereign wealth fund

Income by way of dividend, LTCG capital gain or interest received by specified soveriegn wealth funds from investments made in infrastructure companies before befoe 31 March 2024 shall be exempt from tax.

Safe harbour limit of 5% under section 43CA, 50C and 56 raised to 10 per cent

No presumptive taxation of gains, in cases the stamp duty value is upto 110% of the sale consideration in case of transfer of land or building or both. Earlier this limit was 105%.

Date of acquisition for side pocketed portfolio of mutual funds

It is clarified that the date of acquisition of the units of segregated (side pocketed) portfolio of a mutual fund shall be the same as the date of acquisition of the original units.

Some key budget statistics