Amidst the slowdown in the economy and challenges of lower tax collections, it would not have been easier for the government to frame Union Budget 2020. Post the corporate tax rate cut in Sept. 2019, there were high hopes that the middle-class taxpayers will also be given some tax relief. At the same time, the infrastructure sector also required much-needed investments to push the Indian economy back on track.
The Union Budget has once again been high on vision and structural reforms, but it might have let many expectations down in terms of immediate relief. Here are some of the key highlights of the Union Budget 2020:
Macroeconomic Situation
The government had projected fiscal deficit for the current year at 3.3% of GDP, when it presented the Budget in July 2019. Fiscal deficit is the difference between expenditure and receipts of the government for the year and such deficit is bridged by the government by borrowing funds from the market.
However, with lower tax collections due to tax rate cut for the Companies, the government. has now estimated this year’s fiscal deficit at 3.8% of the GDP, which is 50 bps higher than the earlier estimate.
The relaxation in the fiscal deficit target has reflected that the Govt. is staying realistic and very much aware of the ground realities. Similarly, the next year’s fiscal projections have pegged the deficit at 3.5% of GDP, thereby signifying their responsible intent to move towards path of fiscal consolidation steadily.
Personal Taxation
This was largely expected from this Budget, but instead of reducing the tax rates of all the taxpayers, the government has instead proposed an optional tax regime for the taxpayers. Such taxpayers, who opt for the new tax regime, might be liable for reduced tax rates on their income, but they would also have to forego certain exemptions and deductions available under the Income Tax Act.
An illustrative list of the exemptions and deductions required to be foregone include HRA (House Rent Allowance) exemption, LTA (Leave Travel Allowance) exemption, Section 80C deduction towards certain tax-saving investments, Section 80CCD deductions towards own contribution to NPS account, Section 80D deduction towards medical insurance premium, Section 80G deduction towards donations etc. These are the most commonly used tax benefits, but featuring among the long list of the tax benefits required to be foregone to be eligible for the new rates which are as below:
| Income tax slabs | Existing Rates | Rates under the optional new regime |
| Upto Rs. 2,50,000 | Nil | Nil |
| Rs. 2,50,001 to Rs. 5,00,000 | 5% | 5% |
| Rs. 5,00,001 to Rs. 7,50,000 | 20% | 10% |
| Rs. 7,50,001 to Rs. 10,00,000 | 20% | 15% |
| Rs. 10,00,001 to Rs. 12,50,000 | 30% | 20% |
| Rs. 12,50,001 to Rs. 15,00,000 | 30% | 25% |
| More than Rs. 15,00,001 | 30% | 30% |
Disinvestments and Capital Markets
While the government had set out a target of Rs. 1.10 lakh crores towards disinvestment receipts during the current year, the target has now been revised to Rs. 65,000 crores.
However, the next year’s target has been ambitiously set at Rs. 2.10 lakh crores, considering the current year missed projects which are in the pipeline. Further, the government has also shown an intent to make Life Insurance Corporation of India (LIC) public with IPO during the year 2020-21.
Further, the government has also proposed to abolish the Dividend Distribution Tax (DDT), which was required to be paid by Companies while paying dividend to their shareholders. As such, the distributable surplus with the Companies will increase, allowing the Companies to pay higher dividend. However, such dividend will now be taxable in the hands of the recipient at the tax rates applicable to them.
Banking and Financial Sector
Possibly in the backdrop of Punjab and Maharashtra Multi-State Cooperative (PMC) Bank crisis, the government. has now permitted the Deposit Insurance and Credit Guarantee Corporation (DICGC) to increase insurance cover on bank deposits from existing Rs. 1 lakh to Rs. 5 lakh per depositor. DICGC provides an insurance cover to the depositors in case the bank fails.
MSME (Micro, Small and Medium Enterprises) Sector
The government has proposed for subordinate debt provision for MSMEs through banks, which will help the capital-starved sector to plan their finances in a better manner.
Further, an app-based invoice discounting facility, apart from allowing NBFCs to engage in invoice financing, will help MSMEs bridge the working capital gap for them, boosting their financial and operational sustainability. At the same time, the government has also proposed easing out the compliance burden on MSMEs.
This will be done through simplification of GST compliances and also for relaxing the audit requirement for MSMEs up to a turnover of Rs. 5 crores. However, the relaxation in audit requirement is only for such businesses, which undertake less than 5% of their transactions (receipts and payments separately) in cash.
Other Noteworthy Highlights
Certain other noteworthy highlights of the Union Budget 2020 are:
- In a significant boost to the renewable energy sector, the Budget for the Ministry of New and Renewable Energy (MNRE) has been hiked by 48% over the revised estimates for the year 2019-20.
- TDS at 10% to be deducted by mutual funds on the dividend income distributed more than Rs. 5,000 in a year
- The government has also proposed to plug the tax abuse by the non-residents, wherein the Indian citizens who are not resident in any other tax jurisdiction, will be liable for their global income to be taxed in India, even while they may be eligible for classification as non-residents.
- After the launch of India’s first Corporate Debt ETF, the Govt. is also planning a new debt ETF focusing primarily on government Securities (G-Secs).
Summing it all, there might not be any short-term sentiment boosters in the Budget, but the steps, if implemented and executed as envisaged, will allow the Indian economy to stay on a high-growth path.