Union Finance Minister Nirmala Sitharaman has kept a tight leash on spending despite a sputtering economy, tacitly admitting there is little fiscal space, and settled for a growth rate of just about 6 per cent for 2020-21, assuming an average inflation of about 4 per cent for the year.
Despite a sharp cut in expenditure, necessitated more by falling receipts, the Centre’s fiscal deficit was 0.5 percentage points higher than budgeted for 2019-20 at 3.8 per cent of the GDP. For the next year too, the Budget has curtailed spending across sectors including in flagship schemes, hoping to rein in the deficit at 3.3 per cent of GDP.
The Budget seems to have reconciled to a new normal of lower growth, with the Finance Minister avoiding any adventure, almost conceding it was unable to do the heavy lifting, particularly at a time when private investment has failed to revive, consumption has collapsed, and exports have shown no signs of a pick-up.
Sitharaman’s only growth gambit perhaps revolves around the new and reduced personal income tax structure comprising seven slabs but no exemptions, which she claimed, will give more money in the hands of the middle class, who may spend and boost demand. While the Finance Minister said the move would entail a revenue loss of Rs 40,000 crore if all taxpayers shifted to the new regime, tax experts, argued there was no substantial benefit across different levels of income.
She said that of the 100 exemptions in personal income tax, 70 were being done away with, and the remaining 30 were being reviewed. Finance ministry officials said the restructuring of Budget rates was the first move, and may over a period of time, replace the existing regime where exemptions on housing loans, provident funds, life and health insurance, leave travel concessions, house rent allowance, and standard deduction are allowed.
The markets were not impressed by the measures despite positives for companies such as doing away with the dividend distribution tax at their hands with the Bombay Stock Exchange Sensitive Index dropping almost 2.5 per cent or 988 points.
For the next year, the Finance Minister has relied heavily on receipts from disinvestment (Rs 2,10,000 crore, up 223 per cent) and from communication services (Rs 1,33,027-crore, up 125 per cent), which is largely on account of a one-time Adjusted Gross Revenue payment from telecom companies, as mandated by the Supreme Court in October 2019. A large chunk of capital receipts – Rs 90,000 crore – is expected to be from a partial stake sale in state-owned LIC.
Sitharaman’s estimates on tax receipts for the next year are by and large realistic, although they were way off the mark for 2019-20. The estimates for corporate tax collection growth at 11.5 per cent for the next year look ambitious, more so when it had dipped by 8 per cent in 2019-20. Corporate tax accounts for roughly 18 per cent of all receipts.
In line with protectionist tendencies across major world economies and giving in to domestic industry demands, Sitharaman raised import duty on a over 20 products ranging from walnuts, toys, footwear and furniture to electrical appliances. She also accepted India Inc’s demand to reverse the taxability of dividends back to the recipients, making equity investment more attractive. Now, dividends will be taxed in the hands of recipients, a move that will cost the exchequer Rs 25,000 crore.
She announced a number of measures to widen and deepen the corporate bond and government securities market alongside a specific provision to increase the access to bond market for the micro, small and medium enterprises. Setting the stage for enabling more private sector participation in infrastructure, Sitharaman proposed expanding public private partnerships in both physical and social infrastructure projects in sectors such as railways, highways, medical colleges and smart cities. Further, a 100 per cent tax exemption has been proposed for interest, dividend and capital gains income to major FDI investment in infrastructure projects before March 31, 2024, with a lock-in period of three years.
To restore trust in the financial sector and in the backdrop of the PMC Bank scare, the Budget raised the insurance cover in case of bank failure on deposits to Rs 5 lakh from Rs 1 lakh.
Tightening the rules for those committing frauds under the GST regime, the Budget has made the fraudulent availment of input tax credit, without invoice or bails, a cognizable and non-bailable crime.
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