The budget 2.0 had no big fiscal stimulus, several protectionist duties, and few steps to revive a slowing economy. Disappointed investors sent the Sensex crashing 987 points. Nirmala Sitharaman is betting on a revival of the economy not so much by stimulating consumption, her income tax sops to the middle class will release a modest Rs. 40,000 Crore – as through a 21% rise in government capital expenditure, mostly on infrastructure. This will be mainly financed mainly through record disinvestment of Rs.2.1 Lakh Crore next year, of which Rs. 90,000 Crore will be strategic sales (privatization) and an IPO of LIC will be the star of the rest.
CUSTOM DUTIES HIKED TO PUSH MAKE IN INDIA
Consumers can expect to pay more for imported items with the budget raising basic custom duties to encourage local producers. A large number of items including cigarettes, chewing tobacco along with imported products, like edible oils, fans, table, footwear, electric vehicles, tableware, kitchenware, toys, and furniture are set to become more expensive due to hike in taxes proposed in the Union Budget for 2020-21. On the other hand, newsprint, sports goods, the microphone will become cheaper as finance minister Nirmala Sitharaman proposed reduction in duties on these items in the Budget for 2020-21.
CHANGES IN TAX REGIME
The budget has made the tax structure more complicated by adding three tax slabs. The removal of tax exemptions and deductions certainly makes compliance less tedious, but avid tax planners who maximized their tax deductions will probably pay more tax under the new regime. The new tax regime will be optional and the taxpayers will be given the choice to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions. Tax practitioners noted the new rates regime would only be attractive for non-salaried taxpayers or those who don’t avail any exemptions as of now. For many taxpayers who avail benefits, the difference in tax outgo may not be substantial. The Finance Minister said this could result in savings of ₹78,000 for someone earning Rs. 15 lakh and not availing any incentives in the existing regime.
BIG BLOWS TO NRI
The budget has turned out to be taxing for the non-resident Indian. Firstly, to be categorized as a non-resident, an Indian now has to stay abroad for 240 days a year, against 182 previously. In other words, an Indian national, to claim the non-resident status, can’t stay in India for 120 days or more in a year. The second rule is more deadly: a non-resident Indian, who is not taxed in the foreign country, will become taxable in India. The government said it is introducing this provision to prevent tax abuse.
BENEFIT FOR START-UPS
The income tax law provides a deduction for 100 percent of the income of an eligible start-up for three out of seven years from the year of its incorporation. Budget 2020 increased this period to 10 years. So far, start-ups with a total turnover of up to Rs 25 crore could benefit from this deduction. The limit has now been increased to Rs 100 crore. Both these changes will become effective starting April 1, 2021. There’s an additional benefit for employees of eligible start-ups. Earlier, Employee Stock Ownership Plans or ESOPs are taxed at the time an employee signs up for it and at the time of sale. Budget 2020 amended this provision. Now, ESOPs will be taxed after the expiry of five years from the year in which the employee signed up for it, at the time of sale or when the employee leaves the company, whichever is earlier.
ABOLITION OF DDT AND LTCG STAYS
The abolition of dividend distribution tax will reduce the cost of doing business for high dividend-paying companies such as TCS, Hindustan Unilever and ONGC, but the move to tax shareholders for dividends would impact promoter shareholders and some holding companies. The removal of DDT will help corporates to expand their business. Now either corporate will pay more dividends to investors or will use that fund to diversify their business. India currently levies DDT at an effective rate of 20.5% on companies declaring dividends. Returns on investments in equity mutual funds held over a year are treated as long-term capital gains and taxed at 10% on gains of over Rs 1 lakh in a financial year.
AFFORDABLE HOME LOANS
The government has also extended the deadline for first time home buyers to avail an additional Rs. 1.5 Lakh interest deduction on home loans by a year till 31st March 2021. At present, home loan interest payment of up to Rs.2 Lakh is allowed as deductions across segments, along with loan principal repayment up to Rs.1.5 lakh. The move is expected to boost demand from first-time homebuyers.
E-COMMERCE TRANSACTIONS BECOME TAXABLE
E-commerce operators selling goods or services through their digital platforms will need to deduct 1 percent tax and deposit it in the account of e-commerce participant. Operators mean any entity that owns or operates a platform and pays the provider of goods or services. A participant would be the entity selling goods or services on an online platform. This 1 percent tax will be applicable on the gross amount of such sales or services or both. Services will include fees for technical services and fees for professional services.
AMENDMENTS IN OTHER SECTORS
- Total allocation for ‘Swachh Bharat’ is around 12,300 crore rupees for this year
- Rs 3,000 crore for skill development
- Government announces Rs 99,300 crore outlay for the education sector in 2020-21
- The Budget provides an additional Rs 69,000 crore for the health sector and proposes to expand Jan Aushadhi Kendras in all districts of the country to provide medicines at affordable rates.
- Accelerated development of highways will be undertaken. Delhi-Mumbai expressway and two other projects to be completed by 2023. Monetization of 12 lots of highway bundles of over 6,000km before 2024. 100 more airports will be developed by 2024 to support UDAN.
- There are around 500,000 pending cases valued at about Rs. 8 Lakh Crore; interest, penalty waived if firms pay up before March 31.
- The budget proposes to provide Rs. 1.7 Lakh Crore for transport infrastructure in 2021.
- The government committed to doubling farm income by 2022.