Small measures, big ambitions

While some see the FY 19-20 Budget as a package of minor sops and balms than any real revving for the five trillion dollar goal by 2024, it should be viewed for what it is: a mere estimate of income and expenditure. The booster shots will have to come from other government actions

The budget for FY 2019-20 has been presented. Earlier, an interim budget had been presented before the commencement of the General Elections. There have been contradictory notes of high octane, post the presentation of the budget.

Many have lauded the budget as an inclusive budget for the betterment of all. The Finance Minister has echoed in the Lok Sabha that the budget has an undercurrent of ‘garib, gaon and kisan’ and at the same time it is the first step towards the ambitious goal of the government to reach the five trillion dollar economy by the year 2024. The country, as per the Finance Minister, will become a three trillion dollar economy during the current financial year itself. The government, as clearly articulated in the Financial Survey presentation, has visualized a virtuous cycle of investment in the country to 8% GDP growth from the next year.

On the contrary, the other view is that when our economy has not been doing very well and when our GDP growth has been on the retardation mode, there is nothing in the budget to correct the situation. The ‘animal spirit’ is lacking to fuel the economy. Our share market had a steep fall in the aftermath of the presentation of the budget thus giving a ‘thumbs-down’ by an important segment of our financial system. In this background, an objective analysis of this year’s budget is needed.

For the middle class

The interim budget presented on 1st February should be read together with the main budget, as many policy decisions that were made in the interim budget have been continued. One such decision was to amend the Income Tax Act so as to remove the tax liability for income up to Rs.5 lakh income of an individual. There were also amendments in connection with Standard Deduction against salary and pension income and in the area of tax deduction at source (TDS) on bank interest income. Together with the tax proposals, there were important social proposals helping farmers, small shop-keepers and labourers in the interim budget, which got full resonance in the main budget with some additions.

The criticism that nothing has been done to help the middle class taxpayer is not correct as it overlooks the important proposals in the interim budget. To help the middle class, an amendment has been proposed on the interest of loan taken by first time buyers to purchase a house valued up to Rs.45 lakhs. They will get a total deduction of Rs.3.5 lakhs from the total taxable income. This means an increased deduction of Rs.1.5 lakh for such a category of loan takers.

Easing the pains

There are other proposals in the budget for the convenience of all taxpayers, big and small. PAN will no longer be a pain as Aadhaar will do for filing I-T returns. Those who do not have PAN can file returns by quoting their Aadhaar number and based on the information contained in the Aadhaar such people will be allotted PAN as well.

There has been consistent accusation against tax officers that they harass taxpayers, many a times for their ulterior motive of extracting pecuniary benefits. An administrative policy decision has been taken in this regard, and now assessment will be anonymous. Both assessing officers and taxpayers will remain unaware of each other and thus there will be no human interface. The taxpayer will now address a central cell and questioning and answering will be done electronically.

For businesses too

Earlier, corporate tax was at 25% for companies having a turnover up to Rs.250 crores. This year more companies have been brought under the lower tax rate, now companies with turnover up to Rs.400 crores will enjoy the tax rate of 25%. By increasing the limit, now a total of 99.7% of the companies will be taxed at the lower rate.

The government has realized the importance of startups and there are proposals for relaxation in conditions of carry forward and set off losses for startups.

There are some beneficial measures for investors. The entire lump sum withdrawal from NPS, which was limited to 60% of the accumulated corpus will now be exempt from tax. Long term capital gains arising from the sale of a house is exempted if invested in a startup. Further, the security transaction tax on options to be levied on the difference between strike and settlement price is a new proposal in the budget.

One very good aspect of the budget is to peg the fiscal deficit at 3.3% of the GDP. The Finance Minister has kept a realistic and achievable target of tax collections based on the actual collection of tax in the preceding year. A disinvestment target of Rs.1.05 lakh crore is kept much higher to meet the resource requirement.

Super rich to pay more

Under the category of resource mobilization, the Finance Minister is also seen to have stumped the super rich. Those having income ranging between Rs.2 to 5 crores will have to pay a 25% surcharge and for those having income of more than five crores, the surcharge on tax will be 37%. The net result will be that super rich people with income of more than Rs.5 crore will pay a tax of 42.7% on their income, while the tax on the category of income of Rs.2 to 5 crore, the actual tax yield will be 39% of the income.

Increased revenue will also come from additional levy of central taxes and cess on petrol and diesel by Rs.2 per litre. This measure will, however, hurt everybody as after including local taxes, the petrol price will go up by Rs.2.50 per litre and diesel price will go up by Rs.2.40 per litre.

Import duty on gold and luxury cars have also been increased together with some increased duty on some miscellaneous items to give patronage to domestic production.

Banking helpline

To strengthen our PSU banks, a capital provision of Rs.70,000 crore has been proposed, which to a significant extent appears to be positive, as it will not only address regulatory capital but will also add to the growth of capital. Banks were suffering from delay in recovery of NPAs due to prolonged litigation under the insolvency process.

The budget also gives important attention to NBFCs. Non-banking finance companies have been facing a liquidity problem after the collapse of IL&FS. A lifeline of Rs.1 lakh crore was proposed to ease the shortage of credit to fundamentally sound NBFCs. Help will come in the form of government’s credit guarantee to banks for the purchase of high rated pooled assets of NBFCs. The budget decision to bring them under more stringent regulations of the RBI will also inspire confidence in lenders.

Fund hunt

To reach the target of a five trillion dollar economy by 2024, the Finance Minister articulated her intent of investing Rs.100 lakh crores in the infrastructure segment in the next five years. The government will set up a committee to draw the road map for sourcing of such mammoth funding.

The budget has also opened the way of sovereign borrowing from outside the country. Borrowings in the world market are much cheaper compared to the domestic market and this will also ease borrowings by the private sector as there will be no escrowing by the government. The Finance Minister has reposed confidence in the stability of the rupee in the foreign exchange market while starting foreign sovereign borrowings.

Now, companies with turnover up to Rs.400 crore will enjoy the tax rate of 25%. By increasing the limit, now a total of 99.7% of the companies will be taxed at the lower rate

Checks and balances

Some stern measures are proposed to unmask tax evaders. There will be a provision of 2% TDS for those withdrawing cash of Rs one crore or above in a year from a bank account. A new section 194M will also require a TDS of 5% by any individual or HUF if payment of contract or professional fees is made exceeding Rs.50 lakhs in a year. However, for convenience, this TDS payment can be made by citing PAN while no TAN will be required. Sale consideration of immovable property for calculation of TDS @ 1% shall now also include charges like club membership fee, car parking fee, electricity and water facility fee, maintenance fee etc.

There will be a mandatory provision of filing of returns of income in addition to the existing one. Persons spending more than Rs.2 lakh on foreign travel or Rs.1 lakh on electricity in a year will now have to compulsorily file I-T returns irrespective of his income being less than the threshold limit. Cash deposit of `1 crore or above in any bank will also attract the provision of compulsory filing of returns. Many people have no taxable income though earning huge capital gains on the sale of property after claiming the prescribed exemption / deduction in the Income Tax Act. Such people will now have to compulsorily file I-T returns.

Plugging the loopholes

There are some stricter provisions for gifts received by NRIs from their Indian friends. These will be taxed, so as to plug the loophole which was used for tax avoidance.

The budget proposes to widen the scope of cancellation of registration of religious and charitable trusts that have been violating tax laws.

Companies with large promoter stakes may go on the back foot as the budget proposes to hike non-promoter shareholding in the listed companies to 35% as against present 25%. The share market has not liked this idea, though it is admitted that in the long term, it is good for the company. SEBI will decide the time frame for the promoters to follow the rule.

For NGOs, the budget has announced the creation of a social stock exchange. This will help NGOs raise finance. In particular, those that show concern for the environment will be benefited, as multiple incentives are proposed for electric cars.

It is natural that some people will like the budget while some dislike it, as one platter cannot give pleasure to all. The budget is just a finance bill giving an estimate of income and expenditure for the year and it should only be seen thus. Many policy decisions and administrative actions for the betterment of the country do not come through the finance bill.