The 2019-20 budget aims at boosting infrastructure and foreign investment. Among the highlights of the budget are a whole set of tax benefits being given to the startups and increase in customs duty on items such as gold. PAN and Aadhaar have been made interchangeable. This will allow those who don't have PAN to file returns by simply quoting Aadhar number and use it wherever they require using PAN. Public sector banks will be provided Rs 70,000 crore to boost capital and improve credit.
Special additional excise duty and road and infrastructure cess have been increased by Rs 1 per litre each on petrol and diesel. The threshold on annual revenue for attracting a corporate tax rate of 25 per cent has been raised to Rs 400 crore from Rs 250 crore in a move aimed at making India an investor-friendly country. The 25 per cent tax rate is currently applicable only to companies with annual revenue of up to Rs 250 crore and to new manufacturing companies that do not avail of tax incentives. Those beyond the Rs 250 crore revenue limit are taxed at 30 per cent. The new decision will benefit about 99.3 per cent of the 1.5 million companies incorporated in the country. Only 0.7 per cent of the companies will now remain outside the 25 per cent corporate tax bracket. The budget has allocated a sum of Rs 94,853.64 crore for education sector.
According to the budget proposals, import duty will be hiked on gold and precious metals to 12.5 per cent from current level of 10 per cent. India is one of the largest gold importers in the world.
The budget also proposes the setting up of a Credit Guarantee Enhancement Corporation in the fiscal year 2019-20. The facility will be available for infrastructure and housing projects would enable debt flow towards such projects.
The government proposes issuing Aadhaar card for Non-Resident Indians (NRIs) with Indian passports after their arrival in India without waiting for the mandatory 180 days.
About 60 per cent of the amount received by subscribers of National Pension Scheme on closure of account will be exempt from income tax.
The government has also announced a pension scheme for 30 million small traders. All small shopkeepers and self-employed persons as well as the retail traders with GST turnover below Rs 1.5 crore and aged between 18-40 years, can enrol for this scheme.
The government aims to cut its fiscal deficit target to 3.3 per cent of gross domestic product (GDP) in 2019-20 against 3.4 per cent estimated earlier. The budget lowered the fiscal deficit target to 3.3 per cent of the GDP from 3.4 per cent stated just four months back in the interim budget. Reliance on greater non-tax revenue through stake sale in public sector enterprises may shore up government finances. However, a slowing economy and tepid growth in tax collections will make the target of controlling fiscal deficit tougher.
The income tax surcharge on those earning between Rs 2 crore to Rs 5 crore per annum has been increased by 3 per cent and 7 per cent surcharge on those earning above Rs 5 crore per annum will also garner additional revenue for the government. Higher customs duties on petroleum products and gold will also lead to higher revenue collection.
The reliance on national small savings schemes to control the fiscal deficit is immense as is the reliance on the proceeds from divestment and dividends from public enterprises. The dividend from public sector enterprises including the RBI is expected to be 11 per cent higher than last year.
To attract more global investment, the government will consider further opening up of foreign direct investment (FDI) in aviation, media, animation, and the insurance sector in consultation with stakeholders. Tax incentives were also announced for global manufacturing companies to set up factories in India. Such companies will be invited to build plants in advanced industrial sectors like solar photovoltaic cells, lithium-ion batteries, computer servers, laptops and semiconductors and these companies will be offered tax concessions.
A major announcement in the budget was that India would go overseas to partially fund its borrowing plan for the year and this will pave the way for first-ever sovereign bond issue in foreign currency.
External debt would mean that much less domestic funds would be sought by the government, which in turn would reduce yields in the Indian bond market, help banks pass on policy rate cuts to their loan customers, and ease credit availability to the private sector in general. The added advantage is that interest rates in the Western countries right now are especially low, and so foreign money can be raised comparatively cheaply.
India's sovereign external debt to GDP is among the lowest globally at less than 5 per cent. In this context, over-indebtedness is not a big worry. However there is the problem of exchange rate risk. If the rupee weakens over the tenure of taking the debt, the government’s payback burden would increase, since it would take more rupees to buy each dollar, euro, yen, etc. This risk can be hedged, but doing so against a sharp rupee decline—or, say, a global economic shock—would cost a lot. If one resorts to depend recklessly on foreign debt it could pose threats to the Indian economy.
Changes in taxation
The Finance Minister the other day said that the government has decided to scrap the increase in surcharge on the income tax outgo for both domestic as well as foreign investors proposed in the 2019-20 budget and restore the pre-budget position. This was aimed to encourage investment in the capital market and move will be a big relief for investors, including foreign portfolio investors. As a result of the higher surcharge, the foreign portfolio investors have sold Indian stocks (net) worth over $3 billion over last two months.
The revocation of the budget decision by the government seems to have been the result of the government realizing that high net worth individuals are large investors, and the big increase in taxation in their case will naturally result in lower investments, which is a negative for the markets.
In the 2019-20 budget, the surcharge was raised from 15 per cent to 25 per cent where the income is between Rs 2-5 crore and from 15 per cent to 37 per cent for those earning more. In effect, a person earning in the range of Rs 2 crore to Rs 5 crore will have to pay 39 per cent tax on the income exceeding Rs 2 crore, and a person earning more than Rs 5 crore will pay 42.74 per cent on the income exceeding Rs 5 crore.
Another recent announcement by the government was that startups registered with the Commerce Ministry will be totally exempt from an anti-evasion provision in the Income Tax Act for taxation of share premium known as the ‘angel tax’.
Push for ‘Make in India’ goal
In a bid to spur ‘Make in India’ goal and to bring domestic manufacturing on a level-playing field, basic customs duty has been raised on items such as cashew kernels, tiles, auto parts etc. The budget has given a strong push to the “Make in India" drive through making raw material imports cheaper, import of select finished goods costlier by withdrawal of exemptions that were till now available, and lower the cost of investments into plant and machinery by reducing customs duty on select capital goods.
The government plans to restructure the national highway programme to create network of highways of a desirable capacity for better connectivity. The government also envisions using rivers for cargo transporation, a move that will decongest roads and railways and the Railway ministry is in the process of completing the ambitious dedicated freight corridor (DFC). Railways will be encouraged to make investments and expand network in suburban areas. In the case of Railways, Public Private Partnerships (PPP) will be used to unleash faster development and delivery of passenger freight services.
The government has set an investment target of Rs 80,250 crore for Phase three of the Pradhan Mantri Gram Sadak Yojana, under which the government wants to build 1,25,000 km of village roads.
Public shareholding levels
Listed companies may need to maintain 35 per cent of minimum public shareholding (MPS). The government will ask SEBI to mull a rise in MPS for listed companies from 25 per cent to 35 per cent. While this move will ensure more public investing in equity markets, it will also force corporates to go on a public offering spree. This would also require the market regulator to change several regulations pertaining to public offerings.
This move would enhance liquidity and public say in the listed firms. This move is still at a proposal stage, and the markets regulator has in the past given a few years for companies to comply with minimum public shareholding norms.
Tax sops were announced in the budget for loans taken to buy electric vehicles (EVs) and to make electric vehicles affordable to consumers. The government has proposed additional income tax benefit of Rs 1.5 lakh on interest on loans taken for electric vehicle purchase. The GST on electric vehicles has been cut by 5 per cent to boost demand for electric vehicles.
On the whole, it can be seen that the emphasis of the budget proposals is on giving a significant boost to the vital sectors of the economy so that its growth parameters maintain a healthy upward trend and India continues to remain strongly positioned as one of the most stable economies of the world.