The final budget presented by the finance minister has shaken the market cart, and added material uncertainty to policy making. The efforts to minimize uncertainty after demonetization have thus been negated to some extent.
As has been the practice in the past few years, the budget speech of the finance minister materially diverges from the actual budgetary provisions. By changing the capital gain tax regime and mentioning that they are working on a new Income tax law, they have forced the stakeholders to build-in a higher degree of policy uncertainty and unmindful regulatory provisions in their business and investment plans. Claiming simplification while introducing new complications (e.g., more transactions under TDS/TCS) has been a hallmark of the taxation policy in recent years. Use of technology is invariably claimed as an achievement, as if there is an option.
The level of uncertainty could be gauged from the fact that the priorities outlined in this budget are materially different from the interim budget presented just five months ago
Regardless, there are some positive take away
from this budget that need to be commended.
Positive take away
Land reforms including digitization of land records got prominent mention in the
finance minister’s speech. The minister mentioned that “Land-related reforms
and actions, both in rural and urban areas, will cover (1) land administration,
planning and management, and (2) urban planning, usage and building bylaws.
These will be incentivized for completion within the next 3 years through
appropriate fiscal support.” Linking central assistance to lower stamp duty
could be a material impetus to urban development.
Fiscal consolidation. The finance minister refrained from splurging the extra resources
generated through higher dividend from RBI &, PSUs, and additional tax
revenue. She utilized it to bring the fiscal deficit down to 4.9% (vs 5.1% in
the interim budget). Even the new development projects announced for the key
coalition partners (JDU of Bihar and TDP of Andhra Pradesh) are proposed to be
funded by the loans from the multilateral agencies like World Bank etc., where
the Central Government might provide guarantee. The commitment to bring the
public debt on a declining path from next year is also commendable.
Savings for children. Allowing pension accounts for minor children is a positive step for
developing the social security framework. Retirement planning from birth should
benefit a large number of savers in participating in the golden age of Indian
financial markets and accumulating a decent retirement corpus.
Abolition of Angel-Tax. Angel tax is levied on the capital raised via the issue of shares
by unlisted companies from an Indian investor if the share price of issued
shares is seen in excess of the fair market value of the company. The excess
realization is considered as income of the company and is taxed accordingly.
The finance minister has proposed to abolish this tax (Section 56 (2)). This is
a welcome step as it has been causing hardship to innovators.
Rental housing for industrial workers. The finance minister proposed, “Rental housing with dormitory type
accommodation for industrial workers will be facilitated in PPP mode with VGF
support and commitment from anchor industries.” This scheme if implemented
properly can be a major reform in labor migration, urban planning and ease of
living for poor laborers.
Issues that need deeper scrutiny
Forcing private capex: The Economic Survey highlighted that the private sector has not
adequately responded to the incentives for capex. It seems the government now
intends to force the private enterprises to invest more money in building
capacity and generating employment. The budget adopts a carrot and stick
approach for that. On one hand, it provides support for hiring more fresher
employees and skill them, and on the other hand it makes outflow of funds from
companies difficult. After dividends, now buybacks are also made tax
inefficient. The idea seems to “encourage” companies to invest in growing their
businesses and reward shareholders through share price appreciation only.
New income tax law. The Direct Tax Code had been hanging on the taxpayers’ head for
almost two decades. It was shelved a few years ago. However, the finance
minister has revived the proposal adding uncertainty about the tax provisions.
Backdoor entry of Estate duty. The changes in the capital gain tax regime give an impression that
the government is testing the introduction of a wealth transfer scheme (Estate
Duty) in future. The effective capital gain tax on legacy assets (Large Real
Estate, legacy precious metals, jewelry etc.) has been increased by taking away
the indexation benefit. It is to be seen whether this effort is widened and
deepened in the coming years.
Taxation of bonds. The tax on gains made on sale of unlisted bonds has been enhanced to
the marginal rate of taxation. This brings bonds at par with bank fixed
deposits. This is in tandem with the concerns expressed by the RBI on money
being diverted away from bank deposits. On the positive side, this may provide
impetus to development of retail debt market by encouraging companies to list
their bonds.
Gold and financialization of the economy. Ever since the government embarked on the path of economic reform
and liberalization in 1991, the emphasis of policy has been to achieve higher
degree of the financialization of the Indian economy. Low level of
financialization of economy has in fact been sold as an USP of Indian markets,
for it offered huge growth potential. Lamenting higher degree of
financialization of the Indian economy in the Economic Survey, raising
effective tax on bonds and bringing duty of gold lower contradict this concept.
New rum in old bottles. The finance minister has presented many ideas as path breaking,
while these are already running schemes and execution has been below par. For
example, rural roads, mission for pulses and oilseeds, organic farming,
horticulture, blue economy (shrimp etc.), Employment incentive and support for
MSME (introduced during Covid), Skill India, Industrial Parks, etc.
Protection to local manufacturing cut. The finance minister has cut basic custom duty on mobile phone,
mobile PCBA and mobile charger to 15 per cent, reducing protection for the
local manufacturers. This should be kept in mind by the analysts who are
assuming status quo on policy for many EMS players for decades while making
earnings forecasts.
Union Budget 2004-25
The following are the key highlights of the
final Union Budget for FY25
Budget priorities
1)
Productivity and resilience in
Agriculture
2)
Employment & Skilling
3)
Inclusive Human Resource
Development and Social Justice
4)
Manufacturing & Services
5)
Urban Development
6)
Energy Security
7)
Infrastructure
8)
Innovation, Research &
Development and
9)
Next Generation Reforms
Key direct tax proposals
Corporate/firms Tax
·
For foreign companies the rate
of tax reduced from 40% to 35%, on income other than income chargeable at
special rates, specified in respective sections of Chapter XII of the Act.
·
Deduction under section
36(1)(iva) in respect of contribution to pension fund approved u/s 80CCD
increased to 14% of salary from earlier 10% of salary, provided the employee
concerned has chosen the new tax scheme.
·
Section 56(2)(viib) imposing
Angel tax on companies is proposed to be abolished.
·
Payments to partners by way of
salary, remuneration, commission, bonus and interest etc. to be liable for 10%
TDS.
Personal taxation
·
Amount of standard deduction on
salary income increased to Rs75000 from the present Rs50000 for assessees
filing return under the new tax scheme. For family pension standard deduction
under new scheme will be Rs25000 instead of Rs15000.
·
Any Tax Collected at Source
from an employee to be adjusted in computation of TDS by the employer.
·
Tax collected at source for a
minor can be claimed by the parent if the income of such minor is clubbed with
such parent.
·
The entire amount received from
tendering of share under a buy back will be taxed as dividend income. The cost
of acquisition of shares can be claimed as capital loss that can be set off
against capital gains as per the prevailing rules of set off. (applicable from
1 October 2024)
·
Rent from house property cannot
be shown as business income. It must be shown separately under the head income
from house property and taxed accordingly.
Rationalization of capital gains tax
(applicable from 23rd July 2024)
·
Holding periods for various
assets reduced to two – 12 and 24months from the present three –12, 24 and 36
months.
·
Assets divided into three
categories – Listed financial securities, Equity MFs & Business trust
(e.g., REITS), and other assets. Listed financial securities, Equity MF and
Business Trust held for less than 12 months shall be short term assets and
otherwise long term. All other assets to be long term if held for more than 24
months.
·
Listed financial securities
(STT paid), Equity MFs and Business Trust – STCG Tax would be 20%.
·
LTCG Tax for all other assets
would be 12.5% without any indexation benefit. LTCG of upto Rs1,25,000 exempted
from tax for Listed financial securities (STT paid), Equity MFs and Business
Trust.
·
STCG Tax on all other assets
would be the marginal rate of taxation.
·
Unlisted bonds, debentures to be
taxed at the marginal rate.
·
Capital gain tax rates to be
same for both Resident and Non-Resident assessees.
·
Gift of assets by assessees
other than individual and HUF to be fully taxable.
Rationalization of TDS
·
Sale of more goods with sale
price exceeding Rs10 lacs to be made liable to TCS.
·
Rs 50 lac limit for TCS on sale
of property to be considered as total sale consideration and not the
consideration per buyer, where there are multiple buyers.
STT rates
·
It is proposed to increase the
said rates of securities transaction tax on sale of an option in securities
from 0.0625% to 0.1% of the option premium, and on sale of a futures in
securities from 0.0125 per cent to 0.02 per cent of the price at which such
“futures” are traded.
Others
·
Notice u/s 148 for reassessment
can be issued only upto three years where income suspected to have escaped
assessment is less than Rs50 lacs. In other case time limit would be six years.
·
Provisions for registration of
charitable organization u/s 10(23C) and u/s 11 to 13 found overlapping.
Accordingly, it is proposed to make section 11 to 13 the operational sections.
Section 10(23C) will be used for transitory provisions only. The timeline for
application for eligibility u/s 80G also rationalized.
·
New Vivaad se Vishwas 2024
Scheme to be launched.
· Moveable foreign assets worth less than Rs20 lacs not to attract provisions of section 42 and 43 of Black Money Act.
Key Budget features
