If 2020 created shock waves that reset the world order, cleansed the ecosystem, brought about better community cohesion, enhanced corporate responsibility, emphasized importance of personal wellness, increased innovation, introduced new ways of learning; 2021 affords India an opportunity to establish its standing in the new emerging world economic order.
It was against such a backdrop that the FM presented the Budget on Monday. In the run up to the government’s most closely watched finance document, the hon’ble FM had described this Budget, in the long shadow of the pandemic, as a ‘never before’ event and promised to give abundant attention to all suggestions. Whether she did is for posterity to decide, but the markets definitely gave a big thumbs-up. Let me summarise some key takeaways.
The Budget lays out 6 pillars for its proposals viz, Health and Wellbeing, Physical and Financial Capital, and Infrastructure, Inclusive Development for Aspirational India, Reinvigorating Human Capital, Innovation and R&D and more importantly, Minimum Government and Maximum Governance.
Underlying the said pillars it is interesting to note that the Budget demonstrates a resolve for creation of wealth and not its redistribution; creation of conducive investment climate without resorting to new incentive schemes; reduction of compliance burden coupled with no imposition of new taxes; (particularly in light of the tight fiscal situation); but yet targeting modest growth in tax revenue by placing increased reliance on AI and digital tools in administration of tax rules.
Privatisation and recapitalisation of PSU banks, and setting up of Asset Reconstruction Company and Asset Management Company to consolidate and take over the existing stressed debt for managing and disposal of assets, will not only help monetisation and recovery of stressed assets but also pave the way for reviving sick businesses to grow to their full potential. Easing conditions to transform India into an International Finance Services hub, as also to attract investments from Sovereign Wealth and Pension Funds will provide the huge funds required for infrastructure development. To augment need for long term debt financing in infrastructure sector, it is proposed to also set up a professionally managed Development Financial Institution. Increase in FDI insurance sector to 74% is in line with the reforms in FDI over the last few years. A rationalised single Securities Markets Code are amongst other key proposals for the financial sector.
The FM has also indicated laying down of a policy for a clear roadmap for disinvestment in all non-strategic and strategic sectors. The disinvestment target is kept at ₹1.75 lakh crore. A clear privatisation policy will set the ball rolling while more delays could make investors sceptical about the government’s intent. The announcement of privatisation of two public sector banks and a general insurance company, indicates government resolve.
On the tax administration front, it is heartening to see that the Hon’ble FM has reiterated that the tax system has to be transparent, efficient, and should promote investments and employment in our country. At the same time, it should put minimum burden on our taxpayers.
There is no major tinkering with the tax rates. Over the past few years, the government has followed the path of reducing incentives, and lowering of tax rates.
In this Budget, the FM has continued with the theme of digitization and moving towards faceless tax administration. On dispute resolution, proposals for faceless appeals at the ITAT level, constitution of Dispute Resolution Committee for small and medium taxpayers are welcome. The reconstitution of Advance Ruling mechanism with the proposal to set up a Board for Advance Ruling is also a welcome move as there were practical challenges faced by the taxpayers under the existing system. Rationalisation of provisions relating to re-opening and reassessment is also a positive move that will give certainty to taxpayers.
As regards non-resident taxation, clarification on application of tax treaty rates on payment of dividends to FPIs will prevent unnecessary hardship on account of higher tax deduction under the domestic law. Further, exemption from withholding tax on payment of dividends to REiTs and InViTs will help in unblocking of funds.
While the number of tax return filers has gone up over the last few years, it is still very low. In order to improve tax return filings, the Budget proposes a higher TDS / TCS rates in case of non-filers.
This government has refrained from making retrospective amendments. However, the amendment to deny depreciation on goodwill is sort of a retrospective amendment as it impacts even the existing goodwill and could have been avoided. These are the kind of amendments which create uncertainty and impact investor confidence.
Further, considering the current situation, the government could have incentivised R&D spends by corporates. Also, the salaried class would have liked a few concessions including increased standard deduction or increase in limits for housing loan interest.
All in all, the proposals direct efforts to grow the size of the pie (GDP, taxpayer revenue) to increase tax revenue, instead of focusing on maximising share of revenue of the pie. In doing so, it has addressed variety of business interests—large businesses who can be growth engines, as also small and medium businesses which generate employment and the demand push the economy requires.
Fiscal deficit in FY 2020-21 as per revised estimates is pegged at 9.5% of GDP, while for 2021-2022, it is estimated to be 6.8% of GDP. The gross borrowing from the market for the next year would be around ₹12 lakh crores. This reflects the government’s commitment to kick start the economy. The government has maintained that the aim is to reach fiscal deficit level below 4.5% of GDP by 2025-26, with a fairly steady decline over the period.
As mentioned by the hon’ble FM, post-pandemic, a new world order seems to be emerging, one in which Asia is poised to occupy a prominent position and India will have a leading role therein. The efficacy of any good proposals will however lie in its effective implementation.
Views are personal. The author is Managing Partner – Tax, Deloitte India.