BUDGET 2020
“The Sensex and Nifty have dropped massively!”
“India is heading into a dark age.”
“Don’t worry! These new government schemes will attract investors, and we’ll soon be back on track!”
The Union Budget 2020–21 was recently presented in the Lok Sabha, and there was a multitude of opinions in the Indian audience.
The significant threats the Indian Economy was facing were:
1) Lack of spending power
2) Loss of investor confidence
3) Low GDP Growth
4) Low Consumption Expenditure Growth
5) Unemployment
6) High Fiscal Deficit
The market desperately needed a fiscal stimulus to help thrust the economy in the right direction. The term fiscal deficit refers to a lack of government revenue. This, coupled with a lack of spending power, is a terrible sign. The government had to come up with a way to get money in the hands of people, especially in rural areas — to boost demand.
Solving the issue of a lack of spending power would automatically lead to the resolution of the other problems as well.
If people are willing to spend, investors are more confident to pitch in, and it leads to an improvement in the country’s economy as a whole.
There are two approaches the government could’ve taken to provide this nudge, in the right direction:
1) Increase the demand by giving spending power to people. This would boost consumption.
2) Increase the investment in India (By both foreign and local companies) by providing investor-friendly conditions in the market.
So how exactly did the government go about solving this issue? Did they take any significant risks? Were the schemes brought in after proper consideration of the long term effects?
1) INCOME TAX SLABS
The government introduced new tax slabs that operate differently from the existing tax slabs. Citizens have an option to choose which tax they want to opt for, and some might argue that this has made the tax process more complicated for the common man.
Old Tax Slab — Pay your taxes, but you are eligible for various tax exemptions based on other avenues you invest in, like — vehicles, insurance, etc. This also helped develop the corpus of the companies providing these services/products and served as a long term investment.
New Tax Slab — Pay reduced taxes, but you are no longer eligible for any tax exemptions. The basic idea behind this is to increase the amount of cash in hand of the common man, to boost demand, and provide a thrust to the economy.
This could be a tad bit risky as it renders various investment avenues useless as people may no longer choose to invest in insurances, vehicles, real estate. They would no longer get any tax exemptions. This could have a negative effect in the long term.
2) DEPOSIT AND CREDIT
Earlier, in the case of a bank crisis, only ₹1 Lakh was guaranteed to the depositor from the bank.
After the PMC bank crisis, the govt has increased this limit to ₹5 Lakh to make them feel more secure about their money in the bank. Rising daily expenditure would reduce savings, and this is a move done with the motive to generate interest in deposits.
3) DIVIDEND DISTRIBUTION TAX
The Dividend Distribution Tax has been abolished.
Dividends are a sum of money paid regularly to their investors by the company, depending on their profits as a reward for their loyalty and trust in the company.
Earlier, dividends used to be taxed and then given. Now the full amount of the dividend will be added to the individual shareholder’s income, and the income will be taxed according to the individual’s slab. This has increased the accountability of tax revenue from small investors.
For the rich and the super-rich, the new slab would lead to lesser income as a higher % of their dividends are lost, owing to their high tax rate. It is also a loss of revenue for individual taxpayers.
There is a slight possibility of MNCs, IT Firms paying off more substantial dividends than they did, and this could have a positive effect on the economy.
4) TAX DISPUTE SETTLEMENT SCHEME
There are many direct cases of pending tax in India. This scheme provides an opportunity for people to settle these disputes without paying any hefty penalty. The scheme can be availed until 31st March 2020, and only the disputed amount will have to be paid in this time frame.
5) TAXATION OF NRI INCOME
An NRI will be taxed on the income he derives ONLY from an Indian business or profession. Any income they earn outside India will not be taxed.
Assume there’s an NRI who owns a home in India, and he derives income from it via rent. He presently lives in Dubai, where he pays no tax, and since he doesn’t live in India, he doesn’t have to pay tax in India as well.
This rule says that the NRI will be taxed a specific amount based on the income his house in India generates for him.
Apart from these particular measures, certain minor civil offenses have also been decriminalized in an attempt to urge investors to take more risks without having to worry about tax harassment.
IMPACT ON INDUSTRIES
Information Technology — Impact is expected to be positive. A significant amount of money has been allocated to quantum computing. Internet connectivity to 100,000+ gram panchayats has also been promised.
Infrastructure — 5 new smart cities and 100 new airports have been planned. Work is to be started on the Chennai-Bengaluru Expressway as well. However, the previous track record in the infrastructure sector, and the targets set, do tend to make one skeptical.
New power generation companies would only have to pay 15% corporate tax. This could lead to a reduction of power tariffs as well, and help meet the growing power needs. Sovereign and Foreign wealth fund investments will not be taxed at all, making it a very attractive option for investors.
Agriculture — Farmers have been widely affected by the economic slowdown. The government also delayed the release of data regarding farmer deaths, thus raising suspicion. This budget aims to insure 6.11 crore farmers by introducing schemes like the setting up of the Kisan Rail for goods transportation. Farmers will also be incentivized for going solar and will be assisted by setting up solar pumps.
Education — Urban local bodies will provide internships to young engineers for a year. Degree-level online education programs will be introduced by institutions ranked in the top 100 in NIRF rankings, especially to benefit underprivileged students.
Other sectors like finance, renewable energy, railways also could benefit from the higher infusions. Start-ups have also been given tax relief in some form for their first five years of operation. Plans are in place to set up private hospitals in tier-2 and tier-3 cities.
On the other hand, mutual fund investors were left disappointed, and higher excise duty on tobacco was announced.
An increase in customs duty on electric vehicles has been proposed on the backdrop of Chinese manufacturers providing low-quality products. While this may keep the Chinese EVs away and promote Indian made EVs, it will also make life hard for existing EVs.
The industry is very likely to pay the price and set back India’s attempts at promoting clean and green solutions for transport.
A few other announcements involved the plan to list LIC on the stock exchange and begin the process of its IPO.
NEW TAX SLABS — BOON OR A BANE?
While there has been a substantial reduction in taxes for those earning between Rs 5 lakh and Rs 15 lakh per annum, those above and below these slabs will continue with the previous rate of taxation.
However, the new tax regime is applicable to only those who opt for it. One can still choose to stay with the old tax regime.
Taxpayers are now forced to evaluate and consider their options. People who earlier invested heavily in various avenues to avail tax deductions might be discouraged by the new slab system.
Consider an example :
Ajay, 46, is a Vice President in an IT company, and his wife, 41, works as a high school teacher. They have a 15-year-old son. The couple has a combined family income of ₹ 23 Lakh per annum, which puts them in the highest tax bracket of 30 percent.
They need to build a corpus of about ₹ 4.6 crores by 2031 to meet their goals:
- ₹ 40 lakh and ₹ 60 lakh for the son’s college-related expenditure.
- ₹ 35 lakh for the son’s wedding.
- ₹ 3.25 crore for their retirement.
Ajay has smartly analyzed multiple avenues like mutual funds, provident funds, and gold, and his patience has led to their money being compounded over numerous economic cycles. At their current rate, they seem to be on the route to achieving their goal.
They get about ₹ 1.75 Lakh of tax benefits through various exemptions. Switching to the new regime leads to him getting only ₹ 78,000 of benefits. There is no point in him switching to the new slabs, and he will obviously opt to stay with the old tax slabs.
The exemptions are not very beneficial for people with high incomes, who invest in various avenues to avail tax deductions. However, they could be useful to middle-income earners (₹ 5 Lakh — ₹ 10 Lakh) who usually do not invest much in these avenues.
Given above is a case where a person has an annual salary of ₹ 10 Lakh. Under the old tax regime, he used to avail various tax benefits, and his taxable income would reduce.
Under the new tax regime, all these deductions are removed. However, he will only be charged 20% of his taxable income, as opposed to 30% earlier.
He would be paying a tax of ₹ 2.25 Lakh under the old regime, leaving him with ₹ 7.75 Lakh. Under the new regime, he would be paying a tax of ₹ 2 Lakh, leaving him with ₹ 8 Lakh. He could either look for other ways to avail more deductions, or opt for the new tax slabs.
The budget seems to be more of a short term solution that seeks to help India move away from the downward rut it has been in for the past few quarters.
A nominal GDP growth of 10% has been estimated by the FM, and a target of 3.5% fiscal deficit has been set. The government must execute their schemes properly, to elevate the Indian Economy to where it belongs.
For a common man, financial awareness and the ability to use these schemes to one’s advantage is what will make the difference.
SUMMARY
Issues the Indian Economy is facing –
1) Lack of spending power
2) Loss of investor confidence
3) Low GDP Growth
4) Low Consumption Expenditure Growth
5) Unemployment
6) High Fiscal Deficit
Schemes introduced to boost the Indian Economy –
1) New income tax slabs
2) Deposit limit increment
3) Abolishment of Dividend Distribution Tax
4) Tax Dispute Settlement Scheme
5) Taxation of NRI Income
Expected impact on various sectors –
Positive — Health care, Education, Infrastructure, Textiles, Consumer goods, IT, Agriculture, FMCG, Transport
Negative — Insurance, Tobacco, State-Run Banks, Real Estate, Fertilizers
The stock market of a country, more often than not, is an indication of public perception.
The aftermath of the budget declaration was the Sensex crashing by 1000 points within a few hours! However, it has recently started picking up, probably because people have gone through the schemes, and might have noticed something they can benefit from. Although the new income tax rates were a brow raiser for the lower economic sections of society, the upper class didn’t seem to be very happy about it.
In a nutshell, the budget clauses could’ve been slightly more improvised to give India a much-required boost to achieve its herculean goal of a 5 trillion dollar economy.
