By TN Ashok / New Delhi
Expectations rode high on the FY 2020-21 budget presented today in parliament by the Finance Minister Ms. Nirmala Sitharaman for a major fiscal stimulus to kickstart manufacturing and GDP growth, but the annual fiscal exercise fell flat , if markets negative reaction was anything to go by as fell by 321 points each on NIFTY and 1000 points NIFTY bank index critically spooking investors.
But one hopes they markets will react differently especially the bonds market on Monday as they read fine print of the budget even as the coronavirus scare will drag down the world money markets down as Chinas markets open Monday as WHO has declared this virus as a major health hazard to the globe impeding business travels.
Major cos such as ICICI, TATAs, Reliance, SBI, and sixteen other leading companies fell in their valuations but TCS and other technology stocks moved up north , and one does not know why the markets reacted negatively and hope it will revive Monday. The budget has been shorn of details, weak in numbers and nothing great, investors and bankers and economists said.
But economists generally feel that markets are not a true indicator of the general economy of the country and also the bourses initially reacted negatively but began rallying round on a Black Saturday on the back of the abolition of dividend distribution tax (DDT) for corporates, tax breaks for corporates and individuals. Corporate taxes for new cos at 15% and 22% for existing cos is welcome but the tax breaks for individuals , giving them the option for choosing their own taxation schemes, the old one with deductions and the new one with tax breaks with no deductions and exemptions , has left several chartered accountant companies and individual tax payers highly confused as to where the benefits will actually accrue from, economists feel.
The biggest giveaway in the FY 2020-21 budget has been to the corporates through abolition of dividend distribution tax (DDT) , which hindered their investments in the economy before, reduction in corporate tax for new cos and lesser for existing cos, raising exemption limit for tax payers to rs 5 lakhs from rs 2.5 lakhs ( earlier 5%) and reduction of taxes to 10% from 20% for the biggest chunk of tax payers in the income bracket of rs 7.5 lakh to 10 lakhs. But the highest rate of taxation at 30% remains for people earning over Rs 15 lakhs remains with surcharge which worked out a total tax of 42%. But for those income earning up to rs 15 lakhs and between Rs 12.5 lakhs but less than rs 15 lakhs., the budget has reduced the tax rates from 30% to 25%.
Another big announcement in the budget is the divestment of LIC equity through an IPO. Though the announcement dragged insurance stocks down, government hopes to reach a huge benefit by dipping into the LIC’s gigantic corpus of Rs 31,000 lakh crore, the biggest financial institution in the country. Even a 10% divestment would bring to the government treasury a whopping amount of Rs 3,100 lakh crores plus 100% equity sale in air India, incentivizing portfolio investors with concessions, would more than offset the loss of about rs 65,000 crores ( rs 40,000 crore revenue loss through tax breaks for corporates and individuals + Rs 25,000 crore revenue loss through abolition of dividend distribution tax (ddt)). Will LIC divestment weaken the institution, not really , feel economists .
Presenting the FY 20-21 budget in parliament, Finance Minister Ms Nirmala Sitharaman however said Government has spearheaded radical fiscal measures to ensure that India’s economy continues to tread the path of high growth. India will stay globally competitive and be a favored destination for investment, with the bold historic decision to reduce the corporate tax rate for new companies in the manufacturing sector to an unprecedented level of 15%.
For existing companies, the rate has been brought down to 22%. As a result, our corporate tax rates are now amongst the lowest in the world. The Finance Minister said that in continuation of the reform measures already taken so far, the tax proposals in this budget introduce further reforms to stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigations. Personal Income Tax and Simplification of Taxation In order to provide significant relief to the individual taxpayers and to simplify the Income-Tax law, the Finance Minister has proposed to bring a new and simplified personal income tax regime, wherein income tax rates will be significantly reduced for the individual taxpayers who forego certain deductions and exemptions.
The proposed changes in tax slabs are listed in the following table:
Income Slab (Rs.) Existing Tax Rates New Tax Rates :
0-2.5 Lakh Exempt, Exempt 2.5-5 Lakh 5%,
5% 5-7.5 Lakh 20%,
10% 7.5-10 Lakh,
20% reduced to 15% 10-12.5 Lakh rs bracket
30% reduced to 20% 12.5-15 Lakh
30% reduced to 25% Above 15 Lakh
30% remains at 30% plus Surcharge and cess shall be continued to be levied at the existing rates which will total tax for the super-rich to 42%.
In the new tax regime, substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him. For example, a person earning Rs. 15 lakh in a year and not availing any deductions etc., will pay only Rs. 1,95,000 as compared to Rs. 2,73,000 in the old regime. Thus, his tax burden shall be reduced by Rs. 78,000 in the new regime. He would still be the gainer in the new regime, even if he was taking deduction of Rs. 1.5 Lakh under various sections of Chapter VI-A of the Income Tax Act under the old regime. The new tax regime shall be optional for taxpayers.
An individual who is currently availing more deductions and exemption under the Income Tax Act may choose to avail them and continue to pay tax in the old regime. The new personal income tax rates will entail estimated revenue foregone of Rs. 40,000 crore per year. Measures have been initiated to pre-fill the income tax return so that an individual who opts for the new regime would need no assistance from an expert to file his return and pay income tax. The Finance Minister said she had reviewed all exemptions and deductions which got incorporated in the income tax legislation over the past several decades. Currently more than one hundred exemptions and deductions of different nature are provided in the Income Tax Act. She said that she has removed around 70 of them in the new simplified regime.
FM said that the remaining exemptions and deductions would also be reviewed and rationalized in thecoming years, with a view to further simplifying the tax system and lowering the tax rate.
Dividend Distribution Tax : Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess, in addition to the tax payable by the company on its profits. In order to increase the attractiveness of the Indian Equity Market and to provide relief to a large class of investors, the Finance Minister has proposed to remove DDT, and adopt the classical system of dividend taxation, under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.
In order to remove the cascading effect, the Finance Minister has proposed to allow deduction for the dividend received by holding company from its subsidiary. The removal of DDT will lead to estimated annual revenue foregone of Rs. 25,000 crores. This will further make India an attractive destination for investment. Concessional Tax Rate for Electricity Generation Companies New provisions were introduced in September 2019, offering a concessional corporate tax rate of 15% to the newly incorporated domestic companies in the manufacturing sector which start manufacturing by 31st March, 2023.
In order to attract investment in the power sector, it has been proposed to extend the concessional corporate tax rate of 15% to new domestic companies engaged in the generation of electricity. Tax Concession for Foreign Investments To incentivize investment by Sovereign Wealth Fund of foreign governments, the Finance Minister has proposed to grant 100% tax exemption to their interest, dividend and capital gains income in respect of the investment made in infrastructure and other notified sectors before 31st March, 2024 and with a minimum lock-in period of 3 years.
Start-ups the Finance Minister noted that during their formative years, Start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. Currently, ESOPs are taxable as perquisites at the time of exercise. In order to give a boost to the start-up ecosystem, the Finance Minister has proposed to ease the burden of taxation on the employees by deferring the tax payment for five years or till they leave the company or when they sell their shares, whichever is earliest. An eligible Start-up having turnover upto 25 crore is allowed deduction of 100% on its profits for three consecutive assessment years out of seven years if the total turnover does not exceed 25 crore rupees.
The Finance Minister has proposed to increase this limit to Rs. 100 crore. She has also proposed to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years. Concessional Tax Rate for Cooperatives Cooperative societies are currently taxed at a rate of 30% with surcharge and cess. As a major concession, and in order to bring parity between the cooperative societies and corporates, the Finance Minister has proposed to provide an option to cooperative societies to be taxed at 22% plus 10% surcharge and 4% cess with no exemptions/deductions. She has also proposed to exempt these societies from Alternative Minimum Tax (AMT), just like companies under the new tax regime are exempted from the Minimum Alternate Tax (MAT).
Medium, Small and Micro Enterprises In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, the Finance Minister has proposed to raise by five times, the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crore.
In order to boost less-cash economy, she has proposed that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash. Affordable Housing In the last budget, the Finance Minister had announced an additional deduction of upto one lakh, fifty thousand rupees for interest paid on loans taken for purchase of an affordable house.
The date of loan sanction for availing this additional deduction is proposed to be extended by one year, beyond 31st March, 2020. Charity Institutions Income of Charity Institutions is fully exempt from taxation. Donation made to these institutions is also allowed as deduction in computing the taxable income of the donor. It is proposed to pre-fill the donee‟s information in taxpayer‟s return on the basis of information of donations furnished by the donee. In order to claim the tax exemption, charity institutions have to be registered with the Income Tax Department. It is proposed to make the registration completely electronic under a unique registration number (URN) to be issued to all new and existing charity institutions.
A new faceless assessment scheme has already been introduced. It is proposed to amend the Income Tax Act so as to enable Faceless appeal on the lines of Faceless assessment. Vivid se Vishwas‟ scheme Under the proposed „Vivad se Vishwas‟ scheme, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty, provided he pays by 31st March, 2020. Those who will avail the scheme after 31st March, 2020 will have to pay some additional amount. The scheme will remain open till 30th June 2020.
Instant PAN through Aadhaar In order to further ease the process of allotment of PAN, a system will be launched under which PAN shall be instantly allotted online on the basis of Aadhaar, without any requirement for filling up of detailed application form. Indirect Tax GST A simplified GST return shall be implemented from the 1st April, 2020. It will make return filing simple with features like SMS based filing for nil return, return pre-filling, improved input tax credit flow and overall simplification. Dynamic QR-code is proposed for consumer invoices.
GST parameters will be captured, when payment for purchases is made through the QR-code. Customs On the Customs side, India has taken a quantum leap in the “Trading Across Border” parameter of Ease of Doing Business rankings by the World Bank. India‟s rank has improved from 146 to 68. Imports under Free Trade Agreements are on the rise.Undue claims of FTA benefits have posed threat to domestic industry. In the coming months, Rules of Origin requirements shall be reviewed, particularly for certain sensitive items, so as to ensure that FTAs are aligned to the conscious direction of our policy. 12 Labour intensive sectors in MSME are critical for employment generation.
Cheap and low-quality imports are an impediment to their growth. Keeping in view the need of this sector, customs duty is being raised on items like footwear and furniture. Rate of Duty for footwear is being raised from 25% to 35%; and for “parts of footwear” from 15% to 20%. Rate of Duty for specified Furniture goods is being raised from 20% to 25%. To give impetus to domestic industry, and to generate resource for health services, it is proposed to impose a nominal health cess of 5% on imports of specified medical equipment. Basic customs duty on imports of newsprint and light-weight coated paper is being reduced from 10% to 5%. An increase is proposed in National Calamity Contingent Duty (NCCD) on Cigarettes and Tobacco products. NCCD on Bidis remains unchanged.