With the theme of “Aspirational India, Economic Development, Caring Society” guiding each budgetary allocation, the Union Budget 2020 was announced in the Parliament by Ms Nirmala Sitharaman, in the longest ever speech by a Finance Minister, lasting 1 hour 40 minutes.
The Budget held paramount significance in the present conflicted economic landscape and hoped to steer the Indian economy through various global and domestic headwinds. Whie the estimated expenditure of the government for 2020-21 increased by 12.7% from that of the last fiscal year to Rs 30,42,230 crores, it also led to a fiscal deficit target of 3.5% of GDP, lower than the revised estimate of 3.8% in 2019-20.
While Budget 2020 cannot be termed as a revolutionary budget aiming to bring about massive reforms in the economy, its merits cannot be completely discredited. A mix of both good and bad, the budget aims at establishing new institutions and implementing new policies but falls short in checking and improving the efficacy of the pre-existing systems.
We now analyse the Revenue and Expenditure Budgets in detail and opine on the efficacy of Union Budget 2020.
REVENUE BUDGET
In the midst of an economic slowdown due to slackened consumption demand, impending global recession, climate change activism, when everyone was expecting minuscule increase in government receipts, Budget 2020 proposed an unexpected 16.3% increase in receipts (other than net borrowings) to Rs 22,45,893 crore, owing to higher estimated revenue from disinvestments. However, these increased receipts were overshadowed by rise in estimated expenditure resulting in a higher expected revenue deficit of 2.7% of GDP as compared to the revised estimate of 2.4% in 2019-20.
Tax Proposals:
Income Tax Rates
The government has brought about a change in the income tax rates for people having an annual income of 5 lakhs to 15 lakhs. The reduced tax rates may seem as a direct benefit, but there’s a catch. The new tax rates are optional and can be availed if the person does not claim the exemptions and deductions that he is entitled to. These include standard deduction of Rs 50000, along with other deductions under Section 80 such as leave travel allowance, house rent allowance, interest payment on housing loan, investments in provident fund, insurance premium, donations to charities, among others.
The reason for bringing out such a policy is that a large number of people are not able to spare enough money to invest in provident fund, pension schemes etc. and are thus not able to get maximum advantage of these deductions. The new tax rates proposed could be beneficial to job-starters, pensioners, entrepreneurs and those taxpayers unable to take tax exemptions and deductions under the current tax structure.
Dividend Distribution Tax
A dividend is the sum that a company pays its shareholders from the profit it earns, and DDT is the tax levied on that dividend. Only a domestic company is liable to pay this tax. The tax on dividends leads to double taxation. Initially, companies have to pay DDT for the distribution of dividends. Thereafter a Super Rich Dividend Tax — a 10% tax on anyone who earns dividend income of Rs 10 lakh or above — is imposed. This results in companies trying to evade taxes by issuing bonus shares instead, wherein both the company and the shareholders are happy in the short run due to the fact that there is no cash outflow on the behalf of company and the shareholders can sell the extra shares in the market and earn more money than before.
Domestic companies at present are subject to DDT at 15 percent of the aggregate dividend declared, distributed or paid. As it also includes a 12 per cent surcharge and a 3 per cent education cess, the effective DDT rate comes to 20.35 per cent.
FM Nirmala Sitharaman says that the revenue foregone due to DDT removal will be Rs 25,000 crore. However, the dividends will now be taxed in the hands of recipients at their applicable slab rates, thus leading to no major change in the effective collections of the government, but making domestic individual investors worse off as compared to the time when DDT was imposed on companies.
Tax change for startups
Earlier start-ups were allowed to get a full tax waiver on profits for any three consecutive years out of their first seven years, if they are incorporated between April 1, 2016 and March 31, 2021, provided that their turnover does not exceed Rs 25 crore. The waiver has been extended to start-ups for any three years out of their first ten years. In addition, the turnover threshold has been increased from Rs 25 crore to Rs 100 crore. Such a move is an attempt to counter the dissent arising out of the imposition of Angel Tax so as to enable startups to raise money and aid Indian startups to go global.
Excise Duty
The government has raised the National Calamity Contingent Duty (NCCD) on cigarettes to anywhere between 212% and 388% depending on the size of the incense sticks.The result of this is that the price of smaller cigarettes shall go up by 6-7% while that of bigger cigarettes is going to go up by 4-5%. Market analysts believe that the net impact on taxes shall be an increase of 15% for smaller sticks while an increase of 9-10% for large size cigarettes. It is projected to have an impact on 3-4% of the cigarette volumes.NCCD on other tobacco products like hookah, jarda, smoking mixtures for pipe and cigarettes, chewing tobacco and snuff have also been hiked. However, bidis were exempted.
Customs Duty
The government has hiked the customs duty on imported food and grocery items, shoes, ceiling fans, wooden furniture, kitchenware, appliances, hairdryers, shelled walnuts and other items, with hikes being as high as 100% in some cases.The primary motive behind these hikes is to protect local industries and to prevent Chinese goods from flooding the market. It is an attempt to give a boost to “Make in India”.
TDS on e-commerce transactions The government has imposed a 1% TDS on e-commerce transactions. This is likely to affect the cash flows and working capital of big giants like Amazon and Flipkart as well as their sellers. The TDS shall not apply to sellers having annual sales below Rs 5 lakh, however, it shall impact a large number of bigger sellers and traders. Most retailers have net profit margins of about 3 per cent and this means 33 per cent of their net income will be blocked as TDS.
One of the major reasons which prompted such a move was the fact that such a measure can create traceability of seller transactions on marketplaces. It will ensure that all information regarding income earned is collected. This shall help weed out fly-by-night sellers. On the flip side, it will lead to cash blockages for sellers. It might also lead to a conflict at the WTO. The WTO has placed a moratorium on imposing a tax on electronic transactions; and given that India has imposed such a tax, it might face the ire of the WTO.
Sovereign Wealth Funds The government has decided to give a tax exemption to sovereign wealth funds for their investments in the infrastructure sector. This exemption is available if the investment is made before March 31, 2024, and with a minimum lock-in period of three years. This, along with concessional tax rate for power generation companies, is significantly positive for new investments in the sector.
Disinvestments
The disinvestment target for 2020-21 has been pegged at Rs 1.20 lakh crore, up from Rs 65000 crore previous year, which it expects to raise in the current year. The government has mopped up about Rs 18,000 crore by way of disinvestment in the current financial year so far. The government is going to sell stakes in Life Insurance Corporation (LIC) as well as Steel Authority of India (SAIL) besides completely privatising IDBI by selling the balance holding of government in the Bank to private, retail and institutional investors.
For the next financial year, the government expects a substantial Rs 90,000 crore revenue from disinvestment of government stake in public sector banks and financial institutions. This would be in addition to Rs 1.20 lakh crore estimated to be mopped up from CPSE stake sales in 2020-21.
EXPENDITURE BUDGET
Agriculture
Focusing on inclusive growth “Sabka Saath, Sabka Vikas, Sabka Vishwas”, Budget 2020 allocates Rs 1.6 lakh crores for agriculture, irrigation and other allied sections. It unveils 16 action points to revive the agricultural sector and to double farmers’ income by 2022.The prime highlights of the budget for the agriculture sector include “Krishi Udaan” and ”Kisan Rail” – two schemes that will reduce the massive food wastage generated by the second largest manufacturer of fruits and vegetables in India, after China. The Indian Railways, in partnership with the private sector, will set up Kisan Rail by including refrigerated coaches in Express and Freight Trains. At present there are only 9 refrigerated Parcel Vans available. The Ministry of Civil Aviation will be launching Krishi Udaan which will enclose international and national routes connecting domestic and global markets. Both of the budget initiatives point at building a seamless cold supply chain for fruits, vegetables and other perishables (milk, meat, fish, etc). The shortcoming of the schemes is that they require cold storage warehouses at both the source and destination stations for effective delivery which demands infrastructure establishment at large scale.
It is estimated that India uses more than 230 cubic kilometers of fresh water annually for producing food items out of which a total of 40% are wasted or lost (as estimated by Food and Agriculture Organisation of the UN).The budget advances “Village Storage Scheme” to master storage and warehousing issues. The scheme is to be run by SHGs and women to provide farmers a good holding capacity and to reduce their logistics cost. Complying with the requirements of the Warehousing Development and Regulation Authority (WDRA), more warehouses will be created. There is also a proposition for linking e-NWRs (electronic negotiable Warehouse Receipts) to the e-NAM (Electronic National Agriculture Market) platform. For better compliance, the budget could have made it mandatory for all warehouses set up with centre/state subsidy to register under WDRA because only warehouses registered under WDRA issue e-NWRs.
Other substantials of Budget for the agriculture sector include expansion of “PM Kusum Scheme”. 20 lakh farmers will be allowed to set up standalone solar pumps and 15 lakh farmers will be helped to solarize their grid-connected agricultural pumps. The budget proposes doubling milk processing capacity from 53.5 million MT to 108 million MT by 2025 and also aims at increasing artificial insemination from 30% to 70%.To promote organic farming, the government directs at strengthening “Jaivik Kheti Portal” – Online nation
The Budget held paramount significance in the present conflicted economic landscape and hoped to steer the Indian economy through various global and domestic headwinds. Whie the estimated expenditure of the government for 2020-21 increased by 12.7% from that of the last fiscal year to Rs 30,42,230 crores, it also led to a fiscal deficit target of 3.5% of GDP, lower than the revised estimate of 3.8% in 2019-20.
While Budget 2020 cannot be termed as a revolutionary budget aiming to bring about massive reforms in the economy, its merits cannot be completely discredited. A mix of both good and bad, the budget aims at establishing new institutions and implementing new policies but falls short in checking and improving the efficacy of the pre-existing systems.
We now analyse the Revenue and Expenditure Budgets in detail and opine on the efficacy of Union Budget 2020.
REVENUE BUDGET
In the midst of an economic slowdown due to slackened consumption demand, impending global recession, climate change activism, when everyone was expecting minuscule increase in government receipts, Budget 2020 proposed an unexpected 16.3% increase in receipts (other than net borrowings) to Rs 22,45,893 crore, owing to higher estimated revenue from disinvestments. However, these increased receipts were overshadowed by rise in estimated expenditure resulting in a higher expected revenue deficit of 2.7% of GDP as compared to the revised estimate of 2.4% in 2019-20.
Tax Proposals:
Income Tax Rates
The government has brought about a change in the income tax rates for people having an annual income of 5 lakhs to 15 lakhs. The reduced tax rates may seem as a direct benefit, but there’s a catch. The new tax rates are optional and can be availed if the person does not claim the exemptions and deductions that he is entitled to. These include standard deduction of Rs 50000, along with other deductions under Section 80 such as leave travel allowance, house rent allowance, interest payment on housing loan, investments in provident fund, insurance premium, donations to charities, among others.
The reason for bringing out such a policy is that a large number of people are not able to spare enough money to invest in provident fund, pension schemes etc. and are thus not able to get maximum advantage of these deductions. The new tax rates proposed could be beneficial to job-starters, pensioners, entrepreneurs and those taxpayers unable to take tax exemptions and deductions under the current tax structure.
Dividend Distribution Tax
A dividend is the sum that a company pays its shareholders from the profit it earns, and DDT is the tax levied on that dividend. Only a domestic company is liable to pay this tax. The tax on dividends leads to double taxation. Initially, companies have to pay DDT for the distribution of dividends. Thereafter a Super Rich Dividend Tax — a 10% tax on anyone who earns dividend income of Rs 10 lakh or above — is imposed. This results in companies trying to evade taxes by issuing bonus shares instead, wherein both the company and the shareholders are happy in the short run due to the fact that there is no cash outflow on the behalf of company and the shareholders can sell the extra shares in the market and earn more money than before.
Domestic companies at present are subject to DDT at 15 percent of the aggregate dividend declared, distributed or paid. As it also includes a 12 per cent surcharge and a 3 per cent education cess, the effective DDT rate comes to 20.35 per cent.
FM Nirmala Sitharaman says that the revenue foregone due to DDT removal will be Rs 25,000 crore. However, the dividends will now be taxed in the hands of recipients at their applicable slab rates, thus leading to no major change in the effective collections of the government, but making domestic individual investors worse off as compared to the time when DDT was imposed on companies.
Tax change for startups
Earlier start-ups were allowed to get a full tax waiver on profits for any three consecutive years out of their first seven years, if they are incorporated between April 1, 2016 and March 31, 2021, provided that their turnover does not exceed Rs 25 crore. The waiver has been extended to start-ups for any three years out of their first ten years. In addition, the turnover threshold has been increased from Rs 25 crore to Rs 100 crore. Such a move is an attempt to counter the dissent arising out of the imposition of Angel Tax so as to enable startups to raise money and aid Indian startups to go global.
Excise Duty
The government has raised the National Calamity Contingent Duty (NCCD) on cigarettes to anywhere between 212% and 388% depending on the size of the incense sticks.The result of this is that the price of smaller cigarettes shall go up by 6-7% while that of bigger cigarettes is going to go up by 4-5%. Market analysts believe that the net impact on taxes shall be an increase of 15% for smaller sticks while an increase of 9-10% for large size cigarettes. It is projected to have an impact on 3-4% of the cigarette volumes.NCCD on other tobacco products like hookah, jarda, smoking mixtures for pipe and cigarettes, chewing tobacco and snuff have also been hiked. However, bidis were exempted.
Customs Duty
The government has hiked the customs duty on imported food and grocery items, shoes, ceiling fans, wooden furniture, kitchenware, appliances, hairdryers, shelled walnuts and other items, with hikes being as high as 100% in some cases.The primary motive behind these hikes is to protect local industries and to prevent Chinese goods from flooding the market. It is an attempt to give a boost to “Make in India”.
TDS on e-commerce transactions The government has imposed a 1% TDS on e-commerce transactions. This is likely to affect the cash flows and working capital of big giants like Amazon and Flipkart as well as their sellers. The TDS shall not apply to sellers having annual sales below Rs 5 lakh, however, it shall impact a large number of bigger sellers and traders. Most retailers have net profit margins of about 3 per cent and this means 33 per cent of their net income will be blocked as TDS.
One of the major reasons which prompted such a move was the fact that such a measure can create traceability of seller transactions on marketplaces. It will ensure that all information regarding income earned is collected. This shall help weed out fly-by-night sellers. On the flip side, it will lead to cash blockages for sellers. It might also lead to a conflict at the WTO. The WTO has placed a moratorium on imposing a tax on electronic transactions; and given that India has imposed such a tax, it might face the ire of the WTO.
Sovereign Wealth Funds The government has decided to give a tax exemption to sovereign wealth funds for their investments in the infrastructure sector. This exemption is available if the investment is made before March 31, 2024, and with a minimum lock-in period of three years. This, along with concessional tax rate for power generation companies, is significantly positive for new investments in the sector.
Disinvestments
The disinvestment target for 2020-21 has been pegged at Rs 1.20 lakh crore, up from Rs 65000 crore previous year, which it expects to raise in the current year. The government has mopped up about Rs 18,000 crore by way of disinvestment in the current financial year so far. The government is going to sell stakes in Life Insurance Corporation (LIC) as well as Steel Authority of India (SAIL) besides completely privatising IDBI by selling the balance holding of government in the Bank to private, retail and institutional investors.
For the next financial year, the government expects a substantial Rs 90,000 crore revenue from disinvestment of government stake in public sector banks and financial institutions. This would be in addition to Rs 1.20 lakh crore estimated to be mopped up from CPSE stake sales in 2020-21.
EXPENDITURE BUDGET
Agriculture
Focusing on inclusive growth “Sabka Saath, Sabka Vikas, Sabka Vishwas”, Budget 2020 allocates Rs 1.6 lakh crores for agriculture, irrigation and other allied sections. It unveils 16 action points to revive the agricultural sector and to double farmers’ income by 2022.The prime highlights of the budget for the agriculture sector include “Krishi Udaan” and ”Kisan Rail” – two schemes that will reduce the massive food wastage generated by the second largest manufacturer of fruits and vegetables in India, after China. The Indian Railways, in partnership with the private sector, will set up Kisan Rail by including refrigerated coaches in Express and Freight Trains. At present there are only 9 refrigerated Parcel Vans available. The Ministry of Civil Aviation will be launching Krishi Udaan which will enclose international and national routes connecting domestic and global markets. Both of the budget initiatives point at building a seamless cold supply chain for fruits, vegetables and other perishables (milk, meat, fish, etc). The shortcoming of the schemes is that they require cold storage warehouses at both the source and destination stations for effective delivery which demands infrastructure establishment at large scale.
It is estimated that India uses more than 230 cubic kilometers of fresh water annually for producing food items out of which a total of 40% are wasted or lost (as estimated by Food and Agriculture Organisation of the UN).The budget advances “Village Storage Scheme” to master storage and warehousing issues. The scheme is to be run by SHGs and women to provide farmers a good holding capacity and to reduce their logistics cost. Complying with the requirements of the Warehousing Development and Regulation Authority (WDRA), more warehouses will be created. There is also a proposition for linking e-NWRs (electronic negotiable Warehouse Receipts) to the e-NAM (Electronic National Agriculture Market) platform. For better compliance, the budget could have made it mandatory for all warehouses set up with centre/state subsidy to register under WDRA because only warehouses registered under WDRA issue e-NWRs.
Other substantials of Budget for the agriculture sector include expansion of “PM Kusum Scheme”. 20 lakh farmers will be allowed to set up standalone solar pumps and 15 lakh farmers will be helped to solarize their grid-connected agricultural pumps. The budget proposes doubling milk processing capacity from 53.5 million MT to 108 million MT by 2025 and also aims at increasing artificial insemination from 30% to 70%.To promote organic farming, the government directs at strengthening “Jaivik Kheti Portal” – Online nation
