Vijay Kumar Gaba

 Prologue: If you find these observations completely trivial, that is precisely the idea. The budget speech and most of the promises made thereunder sound trivial, lacking specifics.

As expected, the budget speech of the finance minister, while presenting the last full budget of the union government before the next general election, sounded like an election manifesto. The finance minister counted the achievements made in the past nine years (since 2014) of her party’s government; and made many promises for the future, totally lacking on specifics.

Perhaps for the first time in the history of independent India, the finance minister used “We will” and “will be” to make all the budget proposals. The general convention has been to say “I propose to” or “is proposed”. Besides, the nomenclatures of an overwhelming number of central sector schemes now use “PM” as prefix. It is obvious that the central government is too conscious to ensure that the electorate must know that the benefit provided to them is coming from the central government.

The obsession with complex names of schemes, apparently reworked from a pre-defined acronym, also continues. As has been the practice in the past few years, many schemes have been renamed and/or clubbed to give an impression of new schemes.

The capital allocations made in the budget are mostly incongruent to the promises made, making the promise less credible. Adjusting the promises with the funds allocation, the budget is a mundane account presentation. It provides marginal relief to middle class taxpayers; proposes to plug some loopholes that are used by high networth individuals to evade taxes; continues the task of simplification of tax administration, and proposes to ease compliance for entrepreneurs.

The best part of the budget speech was the recognition of changing socio-economic paradigm in terms of adoption of technology and digitalization of routine life. The finance minister not only used technical jargon in her speech, but also made several proposals that potentially could enhance adoption of technology in the normal course of business, e.g., education, business transactions, data storage and exchange, and public services. The idea is to improve Ease of Doing Business by increasing the speed and efficiency.

Key themes

1.    Inclusive Development

2.    Reaching the Last Mile

3.    Infrastructure and Investment

4.    Unleashing the Potential

5.    Green Growth

6.    Youth Power

7.    Financial Sector

Positive take away

Farm sector

·         Proposal to build an open source digital platform for farmers to improve communication, access and support for agri based enterprise.

·         Establishment of an agriculture accelerator fund to transform agriculture practices, increase productivity and profitability. Farm credit target increased to Rs20trn.

·         Plan to set up massive decentralised storage capacity for marginal and small farmers.

Education & Skill development

·         Plan to materially improve teachers’ training.

·         National digital library for students.

·         Further enhancement of 740 Tribal residential schools.

·         Digitization ancient inscriptions.

·         PM Skill Development 4.0 to be launched; and include coding, AI, robotics, mechatronics, IOT, 3D printing, drones, and soft skills.

Capital expenditure

·         33% increase in total capital expenditure outlay to Rs10trn.

·         100 critical transport infrastructure projects, for last and first mile connectivity for ports, coal, steel, fertilizer, and food grains sectors.

Ease of doing business

·         Simplification of KYC

·         Expansion of Digilocker scope

·         PAN to be common business identifier across agencies.

·         Unified filling process. No need to submit same information to multiple agencies.

MSME support

·         Provision to ensure prompt payment to MSME vendors.

Climate change

·         Rs350bn outlay for energy transition.

·         Green credit program to be unveiled.

Small savings

·         2yr Mahila Samman Savings Certificate bearing 7.5% p.a interest

·         Senior Citizen Savings Scheme limit doubled to Rs30lacs.

·         Limit of monthly income account increased to Rs9lacs for single account and Rs15lacs for joint account.

Negatives

·         No improvement projected in Tax to GDP. Tax revenue to grow exactly in line with nominal GDP growth of 10.5%.

·         Interest payment to rise by 14.8% to Rs10.8trn.

·         No provision for disinvestment proceeds.

·         Sharp cut in capital allocation for school and higher education.

·         Sharp cut in allocation for MNREGA, Food subsidy and assistance.

·         Negative real growth in allocation for smart city, PM Awas Yojna, national Livelihood mission, etc.

·         Abysmal Rs42.4cr (-17%) allocation for capex in agriculture and farmer welfare.

·         Poor 1.7% hike in revenue expenditure for agriculture and farmer welfare.

·         Poor capital expenditure outlay for skill development (Rs99.2cr); Science & technology (Rs88.3 cr); forest and climate change (Rs145cr) food and PDS (Rs150.3cr).

·         Doors opened for opaque off shore derivative instruments (P Notes) through IFSC (GIFT city).

·         Discouraging foreign travel and investments through higher TCS (20%)

Key direct tax proposals

Corporate Tax

·         Increase in limit for presumptive tax – MSME from Rs2cr to Rs3cr; Professionals from Rs50lacs to Rs75 lacs.

·         Payment to MSME to be allowed as expense on actual payment basis, subject to the time limits under section 15 of MSMED Act.

·         New cooperative that commence manufacturing activity before 31 March 2024 may avail lower tax rate of 15% as available to new manufacturing companies.

·         Now the new start up units established before 31 March 2024 could avail tax benefits.

·         Cost of all self-developed/earned intangible assets to be treated as NIL for capital gains purposes.

Personal taxation

·         New tax regime introduced in FY21 to be the default tax regime for all individual assesses.

·         Deduction u/s 54 and 54F in respect of capital invested in a residential house to be capped at Rs10cr.

·         If the aggregate premium on insurance policies issued on one life exceeds Rs5lac in any previous year during the term of the policy, the proceeds from such policies would be taxable as other income. Deduction will allowed for premium paid, if such deduction has not been claimed earlier. This does not apply to ULIP, Keyman insurance and proceeds received post death of the insured.

·         All income from online gaming to be subject to TDS.

·         Conversion of physical gold into electronic gold receipts not be treated as transfer for capital gain purposes.

·         Income tax slabs under new personal income tax scheme reduced to five from seven earlier.

·         Minimum exemption limit increased to rs3 lacs from rs2.5lacs earlier.

·         Standard deduction to be available under new tax scheme also.

·         Effective maximum marginal tax rate reduced from 42.74% to 39% by capping all surcharges at 25%.

·         Limit for exemption in respect of leave encashment increased from rs3lacs to rs25lacs.

·         Income from investment in Market Linked Debentures to be taxed as Short Term Capital Gain on debt securities.

·         Overseas tour package and remittance under LRS (for purposes other than education) in excess of Rs7lacs to attract 20% Tax Collection at Source.

·         The debt repayment component of distribution made by REIT and InVIT to its unit holders to be fully taxable in the hands of unit holders as income.

 

Fiscal Trends

Trends in government expenditure

Honb’le Minister,

 

As per media reports, the finance ministry officials shall start exercise for preparation of Union Budget for FY22 from 16 October 2020. The exercise usually starts with the finance ministry official and the finance minister meeting with various stakeholders, especially the business representatives; representatives of professional bodies like ICAI; officials from other administrative ministries; officials from state finance ministries; and policy making and statistical bodies etc. The suggestions made in these meetings are then considered in the preparation of final draft the budget documents.

Budget making is normally a very complex exercise that requires special skills to strike an optimum balance between the expectations of various stakeholders. These expectations are invariable at odds with each other. Therefore pleasing most of the stakeholders is almost an impossible task. In past many finance ministers have used some Big Bang announcement to overwhelm the stakeholders so that they are motivated to ignore their parochial interests for a promising bigger picture. The instant reaction of financial markets to all such big bang announcements is usually “ebullient celebration”. The euphoria however subsides in few weeks and markets usually return to their normal trajectory.

The budget making exercise for FY21 would be particularly complex for a myriad of reasons.

Firstly, the government has already announced multiple fiscal and monetary packages during the course of FY2 in the wake of the socio-economic lockdown announced as preventive measure for COVID-19 pandemic. There may not be much scope for giving any further relaxations in the budget; even though the stress in most sectors of the economy is still elevated and almost everyone is looking for a further, stronger dose of stimulus.

Secondly, the shortfall in revenue collection during FY21 is unlikely to be completely made up in FY22. The fiscal balance of the government thus remains precarious. The 2HFY21 borrowing schedule announced by the government is a clear indication that the government (i) does not want any significant deterioration in the head line fiscal deficit number; (ii) may encourage PSUs, Railway and States to raise resources on their own account; (iii) may accelerate the effort to disinvest its stake in PSUs like LIC, BPCL, etc.

This essentially means that both debt and equity markets will remain adequately supplied for most of next 12-15 months. The profile of the sovereign and quasi sovereign debt available in the market will deteriorate significantly with PSU corporate debt and state debt dominating the fresh supply. There could be a paradoxical situation where the benchmark yields are sustained at lower level by the maneuvering by RBI, while the spreads of center-state debt and 10yr-PSU bonds spread rise materially. The situation may worsen further if the business activity picks up sharply, leading to compression of credit-deposit gap, thus leaving banks with lesser resources to absorb the excess supply of sovereign and quasi sovereign paper.

Failure to implement agenda for disinvestment of strategic assets like BPCL, Air India etc, may force the government to dilute holdings in profitable PSUs like Coal India, NTPC, BEL and LIC. This will keep the equity markets well supplied throughout the year, capping any material upside due to liquidity.

Thirdly, the government would be constrained to raise fresh revenue through taxes and additional cess; especially when the dividend from PSUs is likely to dwindle further and elections to key states of UP and West Bengal would require continuous additional social sector spending. This will be the trickiest situation. Obviously, rich would be burdened with additional taxes and stocks markets usually do not like the rich people to be bothered much; and the government would like stock markets to be happy so that it can sell whatever it wants to. It would be interesting to watch how the finance minister manages to get out of this loop. The best place to watch this opera would be from the top gallery which is farthest from the arena.