Finance Minister Nirmala Sitharaman, presenting her first Budget, found novel ways of raising resources while also seeking to restore confidence in the financial sector and deepening the equity and bond markets. A major thrust of the Budget was simplifying the payment of both direct and indirect taxes, as well as support for small and medium enterprises and start-ups. Capital expenditure was crunched to help meet fiscal consolidation targets.
The fiscal deficit target for the ongoing fiscal year has been lowered to 3.3 per cent of gross domestic product (GDP), lower than the Interim Budget’s 3.4 per cent. In spite of disappointing indirect tax revenue, this was achieved through raising the targeted nominal GDP growth from 11.5 per cent to 12 per cent, as well as higher excise on fuel, which would raise an additional Rs 40,000 crore. More money would also come in from disinvestment, dividends from the Reserve Bank of India, and spectrum auctions.
The bond market cheered the announcement that the government would raise its external forex-denominated borrowing, reducing pressure on the domestic market. G-Sec yields fell to the lowest since 2017. Sitharaman noted this was possible as India’s external debt was among the lowest in the world.
The equity market was less pleased, with the Sensex falling almost 600 points from its intra-day high after the Budget speech. The FM said she had asked the market regulator to raise the minimum public shareholding in listed companies to 35 per cent from 25 per cent, which would release a large amount of equity. Securities transaction tax will henceforth be levied only on the difference between the strike price and the settlement price when an option an exercised. An investment option in exchange-traded funds (ETFs) was proposed to aid in meeting an enhanced disinvestment target of Rs 1.05 trillion. The Budget has introduced a distribution tax on buybacks of listed companies. Sitharaman also said the government was committed to strategic disinvestment, including that of Air India, and might redefine the requirement of a minimum 51 per stake for the government to include the holdings of state-controlled institutions such as LIC.
The financial sector was a reform focus. Troubled non-banking financial companies were thrown a lifeline: The FM said that tax benefits provided to banks with respect to NPAs would be extended to NBFCs, and that a partial credit guarantee would be provided to public sector banks for their purchases of securitised NBFC assets. The RBI’s regulatory authority over NBFCs would be strengthened — and it would also once again become the regulator of the housing finance sector. Bank recapitalisation was higher than expected, at Rs 70,000 crore.
There was, however, bad news for the highest bracket of taxpayers: Sitharaman said that the effective tax rates for those with a taxable income above Rs 2 crore would increase by 3 per cent and, above Rs 5 crore, by 7 per cent.
While income tax rates remained unchanged for the middle class, several measures were introduced to improve tax administration.
Under the new income tax rules, PAN cards and Aadhaar cards will be made interchangeable soon. This means that taxpayers will need either Aadhaar card or PAN card to file their income tax returns. At present, they need to have both to file returns. A tax subsidy of Rs 1.5 lakh was announced for taxpayers taking loans to buy electric vehicles, and an additional Rs 1.5 lakh deduction has been proposed on interest paid for affordable housing loans of up to Rs 45 lakh availed before March 2020.
The Union Budget featured promises of simplified procedures for the GST, perhaps prompted by a shortfall in GST revenue of about 16 per cent over 2018-19. Sitharaman proposed an electronic invoice system and bill payment platform that would render the e-way bill redundant and reduce compliance costs. Duplication in the system was to be cut down on. Similar measures were promised for income tax, including a pre-filled form for smaller taxpayers. The promised reduction in corporate taxes was extended to another set of companies — now only companies with a turnover over Rs 400 crore will not have access to the lower 25 per cent rate.
MSMEs were not forgotten — GST registered MSMEs were promised a two percentage point interest Subvention on fresh or incremental borrowing, although only Rs 350 crore was set aside for this scheme. Start-ups burdened by the “angel tax” were promised minimised scrutiny, and additional measures to allow them to raise money more simply were proposed.
In what will increase petrol and diesel prices in the country, the Budget has proposed an additional excise duty and road and infrastructure cess of Rs 2 on every litre of petrol and diesel sold in the country.
On the external front and the openness of the Indian economy, there was good and bad news. The FM promised that onerous local sourcing conditions for single-brand retail would be relaxed. Meanwhile foreign direct investment in insurance and aviation sectors might be opened up. Some constraints on foreign portfolio investment in individual companies were also eased.
However, the last section of the Budget speech included a lengthy list of increased tariffs or withdrawn exemptions that furthered a recent tendency to view “Make in India” as a protectionist policy. Goods from cashews to air conditioning units were rendered more expensive. Duty on gold and crude oil was also raised.