Budget 2020: Govt to focus on tax incentives, private investments

Long-term capital gains tax could be abolished

The government is setting the tone for 2020-21 Union Budget with a clear focus on steps to encourage private investment, sources in the know said. If welfare schemes were at the centre of Budget-making in the past few years, private investment, economic growth, and tax incentives are expected to be the dominant themes now, they pointed out.

The 2019-20 Budget, after the general election, drew flak and several \initiatives had to be rolled back. In that backdrop, the political leadership is likely to have a bigger role in preparing the Budget this time, according to senior officials.

Among the steps that are being considered for the upcoming Budget on February 1, long-term capital gains tax may be scrapped and the burden of dividend distribution tax could perhaps be shifted from companies to shareholders. Also, the Budget could provide income tax relief for the salaried classes, while proposing tax sops for small, medium and micro enterprises. These measures are expected to revive the animal spirits in the private sector as well as ensure greater liquidity in the system.

“The initiative was somewhat lost after the last Budget. The amendments to the Companies Act criminalising corporate social responsibility lapses were also rolled back,” said a government official. 

All of this just added to the narrative of economic mismanagement, alongside the slowdown, the person said. 

The Narendra Modi government wants the 2020-21 Budget to serve as a springboard for reforms in the midst of a slowdown, the official quoted above said. In some ways, the next Budget  is being seen as a vision document for the Prime Minister’s aim to make India a $5-trillion economy by 2024-25.

The government believes public investment and capital spending commitments from the Centre and state-owned companies won’t be enough to kick-start economic activity. 

So, private investment must also pick up to revive the economy, according to another official.

“Unlocking private investment will be the key to beating slowdown. Steps have already been taken over the past few months, and there will be more in the budget,” he pointed out. 

“The last five years were about making welfare and social sector schemes more targeted and efficient. The next five will be about growth and the private sector,” he added.

In fact, the proposed tax measures for the Budget are something that people in the top levels of the government are taking a keen interest in. 

To arrest slowdown, Finance Minister Nirmala Sitharaman in September announced steep cuts in corporation tax rates, effective from April 1 this fiscal, despite some opposition within the bureaucracy. The rate was cut to 22 per cent from 30 per cent for the existing companies that do not get any exemptions, and to 15 per cent from 25 per cent for new manufacturing companies.

Apart from corporate tax cuts, Sitharaman has in the recent past made several sector-specific announcements aimed at MSME, housing, non-banking financial companies and other sectors to alleviate the deep consumption slowdown.

The FM has over the last few months been interacting with tax officials, representatives of industry and MSMEs and other stakeholders across cities. She’s learnt to have taken extensive feedback from stakeholders during those interactions, much before the traditional pre-budget meetings.

Real GDP growth for the April-June quarter was 5 per cent, the lowest since 2013. The nominal GDP growth came in at 8 per cent, the lowest since the third quarter of 2002-03. July-September quarter numbers could hover around 4 per cent, estimates suggest. For 2019-20, the growth could be between 5 and 6 per cent.