HomeBusinessA deep-dive into the Union Budget 2020 announcements

A deep-dive into the Union Budget 2020 announcements

Date:

Trending

- Advertisement -
Advertise During Budget
Advertise During Budget
Advertise During Budget
Advertise During Budget

The Union Budget for FY21 is a progressive initiative and is an “investment in medium to long term economic development” and should be viewed as a continuum in a series of positive initiatives taken by this government over the past few years namely demonetization in 2016 which helped formalize India’s informal economy and drove cashless transactions.

GST implementation in 2017 which consolidated the tax structure and resulted in real savings for the households and reduction in corporate tax rate in 2019.

- Advertisement -

The government continued on this development agenda in this budget also by infusing liquidity into NBFC’s, abolishing the Dividend Distribution Tax (DDT) and providing personal income tax rebates in the budget 2020 amongst other highlights elaborated below. 

The government raised its fiscal deficit target to 3.8% of the GDP from 3.3% pegged earlier for FY20 under the auspices of the FRBM Act. This rise in fiscal deficit has taken place due to the gestation period required for revenues to fructify through increased investments versus short term losses to the exchequer due to a reduction in tax rates and other benefits to the industry. 

Seeing the current fiscal situation, we welcome the steps that the government has taken by extending corporate tax reduction to individual tax slab reduction as well for both individuals and corporate taxpayers.

It was a wise move on the part of the government to pass on money into the investor’s hands and give them the option to choose their investment avenues.

- Advertisement -

Let us discuss below some significant reforms which were proposed in the budget FY21:

Removal of DDT : The abolition of the Dividend Distribution Tax (DDT) is going to reduce the cost of doing business for companies that pay DDT for high dividends payouts, such as Indian Oil, NTPC, BPCL, Power Grid and private companies such as Infosys and ITC.

- Advertisement -

At present, the DDT was applicable at an effective rate of 20.5% on companies declaring dividends. It is over and above the corporate tax. It would also be positive for multinational companies. Globally, developed countries do not have DDT, so this step puts India firmly in their league. 

SlabsAlternateExisting
Up to 2.5 Lakh0%0%
2.5 Lakh – 5 Lakh5%5%
5 Lakh – 7.5 Lakh10%20%
7.5 Lakh – 10 Lakh15%20%
10 Lakh – 12.5 Lakh20%30%
12.5 Lakh – 15 Lakh25%30%
15 Lakh+30%30%

Rebate in income tax rates: The government has given multiple tax rebates to all classes of taxpayers and introduced an optional new income tax regime; this will put additional disposable income in the hands of the common man.

Taxpayers will have a choice to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions. 

The Personal Tax exemptions announced by the Finance Minister will play a meaningful role as follows:

  • For new earners coming into the workforce, it would increase their cash in hand and give them the option of utilizing or investing these funds as they think best. 
  • So, from a regime of guiding investments through tax exemptions in specific instruments, the choice of investments of a significant part of the citizen’s earnings is being handed over to them – this is a good decision in an era of a connected world, where markets and individuals have the benefit of up-to-date information, which allows them to make their own decisions.
  • This would also send a positive signal to consumers, which would help create a positive market sentiment, wherein people do not hold back spending due to lack of confidence. Instead, they behave normally and hence kick-start the economy.

Sovereign Wealth Funds for Infrastructure:

The Government took a bold step by announcing major tax concessions on investments by Sovereign Wealth Funds. The Finance Minister proposed to grant 100 percent exemption on interest, dividend and capital gains income on the investments made in the infrastructure and other notified sectors.

The timeline for availing this benefit has been fixed on March 31, 2024, with a minimum lock-in period of three years.

Sovereign Funds of countries have massive financial assets and when they will get 100% tax exemption on investment into infrastructure projects in India, it becomes an extremely lucrative proposition for them.

Let us not forget that the extremely favorable loan received from Japan for construction of the high-speed railway between Mumbai & Ahmedabad is a prime example of such a sovereign fund investment. 

Tax dispute resolution:

Reduction in tax disputes is a long term policy step, which can reduce tax disputes, increase trust in the government and ultimately increase net tax revenues. The “Vivad Se Vishwas” scheme has been introduced to end the conflicts, perceived as vexatious.

It will enable the government to generate short-term revenue. On successful implementation of this scheme, the nation will move a long way towards ease of doing business.

Small & large institutions will be relieved from cumbersome paperwork and huge penal burdens; it is worthwhile emphasizing that penalties on tax impropriety include stiff fines and imprisonment.  

We see the Union Budget 2020 as a road map for economic improvement on a longer-term horizon.

The Finance Minister is not looking to see how the next 18 months play out, but instead is focusing on the next 5 to 8 years. She is laying out the roadmap for that objective, one step at a time. The corporate tax cut has effectively made the Indian tax regime at par with global countries. 

The efforts of the government, as elaborated below, are highly laudable in terms of supporting the MSMEs which constitute over 33% of India’s manufacturing output:

  • Protecting certain customized, artistic, labor-intensive MSME sectors like footwear and furniture, by raising import duties for outside competition.
  • Easing the audit and compliance burden by increasing the limit for audit by an Accountant to Rs. 5 Crores; we should read this in the backdrop that MSMEs are a significant employment driver and given their small size, the complexity of paperwork is a bane for them.
  • Easing issues of delayed payments faced by MSMEs by launching an invoice financing App; this would significantly ease their working capital requirements as funding for small business entities that don’t have the advantage of scale has its own issues.
  • Continuing from the above point on facilitating their working capital requirements, MSMEs can avail working capital loans from banks which would classify as quasi-equity and be fully guaranteed.
  • Aiding the invoice financing of MSMEs by NBFCs by making amendments to the Factor Regulation Act; this makes much sense in an environment where NBFCs themselves are dependent upon funding from banks which they, in turn, pass on to the MSMEs.
  • Other good initiatives like a Unified Procurement System & a single-window E-logistics market; given the compact structure of MSMEs, this would allow them the freedom to focus on their core activities rather than worrying about these staff functions, the government in a sense would act as an aggregator who would obtain and pass on the benefits of scale to the MSMEs.

Now, let us talk about the proposed divestment of the part stake in LIC:

  • LIC and BPCL are the superstar performers in the public sector portfolio. Hence, confidence is high that these divestments would take place with ease as per the targeted schedule and in turn, keep the fiscal deficit within the projected numbers. As per briefing by the Finance Secretary, an inter-ministerial group will soon be set up for the IPO. 
  • LIC is a massive entity in terms of market capitalization, and even a limited percentage stake sale would easily help achieve the government’s Fiscal Deficit management target. The government would still have a sizeable controlling stake in LIC; quantum of dilution is unlikely to exceed 10%. Hence the Indian citizen who has invested in LIC policies need not have any fear.

The Bullion Exchange, which is proposed to be set up in GIFT City, Gandhinagar will allow foreign players to trade in our bullion in their own respective currencies, thus helping gold find its right price and assist in calibrating it with international bullion prices where today there exists a differential.    

The government has given an extremely reasonable budgetary estimate this time. If the government can do divestment of BPCL, LIC, CONCOR, and Air India, meeting the divestment standards set by the government will be a cakewalk.

The target of 10% nominal GDP growth is easily achievable. Most of the tax receipts that have been budgeted for are less than the nominal GDP growth; hence, the government is being conservative in terms of inflows. The target nominal GDP growth and growth in tax receipts should be easily met. 

The projected infrastructure investments by the government are excellent measures for building up long-term capital investments by foreign players. A significant portion of the money obtained from the divestment will be channeled towards capital investments, which is a very good sign.

To conclude, the Union Budget 2020 has provided several significant reform measures which were the need of the hour and has effectively provided a road map for an improvement in the Indian economy from a long-term perspective.

THE SNAPSHOTS, IN YOUR INBOX

Get quick snaps of everyday happening, directly in your inbox.

We don’t spam! Read our privacy policy for more info.

- Advertisement -
Krishna Mali
Krishna Mali
Founder, CEO & Group Editor of TechGraph.
spot_img

More Latest Stories

Related Stories