India’s once-in-a-century budget runs into trouble as virus strikes back

  • 17 May 2021
  • Budget
  • Comments Off on India’s once-in-a-century budget runs into trouble as virus strikes back

Many praised India’s annual budget in February, raising hopes that it would spark a rapid economic recovery. However, there are now concerns that its promise may be unfulfilled since it failed to account for a crippling second wave of COVID-19 infections.

The budget aims to resurrect Asia’s third-largest economy by investing in infrastructure and health care, while relying on an aggressive privatisation plan and strong tax collections – on the back of anticipated growth of 10.5 percent – to cover its expenditure in the fiscal year.

India would not see a budget like this in “100 years,” according to Finance Minister Nirmala Sitharaman. At the time, the economy was on course to recover from its deepest recorded depression, thanks to a huge COVID-19 immunisation campaign and a revival in consumer demand and investments.

After the United States, the South Asian country is fighting the world’s second-highest coronavirus burden, with 300,000 infections and 4,000 deaths every day. With numerous sections of the country under varying degrees of lockdown, most of the budget’s growth estimates are now in jeopardy.

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The severity of the problem has investors questioning if India, which was once anticipated to become an economic giant, still deserves to keep its ‘investment grade’ rating after years of debt accumulation.

India’s catastrophic second wave, according to Moody’s, will hinder the near-term economic recovery and may have an impact on longer-term growth dynamics. It lowered its GDP prediction from 13.7 percent to 9.3 percent.

While the government claims it is too early to modify its own figures, officials privately admit that if social distancing measures persist, growth will be far more muted than previously predicted.

Apart from giving 350 billion rupees ($4.78 billion) in the budget for vaccine expenditures, the government had not set aside any funds for contingencies arising from a second wave, and officials say the government may now have to cut back on some expenditure.

A request for comment from India’s finance ministry was not returned.

 

PRIVATISATION DELAYS

The Indian bureaucracy has been hard damaged by the health crisis, with many key employees afflicted with the coronavirus, delaying decisions on privatisations and other suggested reforms.

budget
Two senior officials stated that the privatisation of assets such as oil refiner Bharat Petroleum Corp and national carrier Air India, whose processes are well along, could now be put back to early 2022, three months later than envisaged.

“The virtual data room for BPCL NSE -0.44 percent has been opened for initial bidders,” one of the executives said, “but given the lockdown, physical verification of assets is unlikely right now.”

The delays will have an impact on a number of other privatisation proposals, including two banks, insurance, and energy businesses, which are at the heart of the budget’s proposed reforms and are critical to meeting the nearly $24 billion target from asset sales and privatisations, according to authorities.

According to them, the issue is also likely to postpone India’s largest insurer Life Insurance Corp’s IPO, which was anticipated to raise $8-$10 billion.

According to another source, the lockdowns will begin to influence tax collections in June, potentially decreasing revenues by 15% to 20% compared to projections for the quarter.

BUDGET 2020: Major Tax Proposals

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Tax Proposals : BUDGET 2020 

    • TAXPAYERs’ CHARTER in various Acts like Companies Act, for removing harassment of and protecting Taxpayers.
    • VIVAD SE VISHWAS SCHEME IN INCOME TAX – No interest & penalty if the tax paid by 31st March 2020. Some additional amt. By 30th June.
    • Option to Individual without around 70 exemptions/ Deductions (With 1.5L Ch VIA Deductions) -Till 5L – No Tax
      5L – 7.5L – 10%
      7.5L – 10L – 15%
      10L – 12.5L – 20%
      12.5L – 15L – 25%
      More than – 30%
    • Prefiled tax return for individuals in the new regime.
    • Dividend Distribution Tax –  scrapped for companies. Dividends to be charged to recipients.
    • New Electricity Generating Companies Corp Tax Rate 15%.
    • 100% Tax exemption to foreign investment in the priority sector.
    • Start-Ups – ESOPs to employees to be taxable after 5 years or sale or as per other conditions.
    • Turnover limit for the exemption for Start-Ups now 100 Cr.
    • Options for Co-operative Societies: Co-operatives can choose a 22 per cent tax with 10 per cent surcharge and 4 per cent cess with no exemptions.
    • TAX AUDIT THRESHOLD LIMIT –  Increased to 5 Cr. But with business with cash transaction of not more than 5%
    • Tax Holiday to developers of affordable housing extended by 1 year.
    • Limit of difference with a circle can be 10% now (up from 5%).
  • Faceless Appeals on lines of Faceless Assessments.

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Relaxation and clarity expected in Budget 2020 on capital gains tax

Relaxation and clarity expected in Budget 2020 on capital gains tax

In order to encourage small taxpayers to invest in the stock market, the government may consider raising the Rs 1 lakh limit to tax long-term capital gains from the transfer of such equity shares and equity-oriented funds units.

The aspirations of individual tax-payers are strong with the annual budget around the corner. Given the recent decline in corporate tax rates, individual taxpayers still expect tax rate cuts and relaxations to come their way.

Long-term capital gains on the selling of stock shares and equity-oriented fund products. The recent years have seen reforms in the taxation of capital gains that have raised the tax burden on individual taxpayers. For example, for transactions made on or after April 1, 2018, the long-term capital gains (LTCG) exceeding Rs 1 lakh on the selling of equity shares and equity-oriented funds units on which Securities Transaction Tax (STT) is paid, previously tax-exempt, is taxed at 10 percent.

In addition, the Government may also consider specifying a holding period (i.e. 5 years) and, where such shares or units are transferred after the specified holding period, long-term capital gains may be considered exempt.

Time limit for completion of construction under sections 54 and 54F

In the case of immovable property, a welcome step would be to increase the time limit for building house property to use exemption under sections 54 and 54F. The cap is actually to build a new house within three years from the date of selling the old one. In many cases, however, building completion takes longer.

In spite of this, to avoid taxpayers ‘ suffering due to loss of exemption due to the failure to finish construction, the time limit for building a house under section 54 and section 54F could be extended to 5 years. This is in accordance with the time limit for the deduction of interest on housing loan provided for under section 24 as amended by the Finance Act, 2016.

First-year for calculating the indexed cost of acquisition

According to the joint reading of Explanation, 1(b) to Section 2(42A) and Section 49(1) of the Income Tax Act, 1961, the holding period of the previous owner shall be considered in deciding the holding period of the capital assets obtained by the taxpayer through certain acquisition methods, such as gifts or inheritances. However, as provided for in Section 49(1), the expense of purchase about such properties shall be determined based on the previous owner’s costs.

However, based on a literal reading of the Explanation to Section 48, it is possible that the indexing cost inflation index for such long-term capital assets should only be considered from the date on which the taxpayer first held the asset (and not from the date on which the previous owner first held that asset).

 

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