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.

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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.

GST – Imp Amendments proposed in Budget 2021

1. Exporter liable for penalty equal to 500% of refund claimed if Input taken on invoice obtained by fraud, collusion, wilful misstatement

2. Input Tax credit can be availed when the supplier furnished the details of the invoice in GSTR-1 and such details communicated to the recipient (as shown in GSTR-2A/2B)

3. GST Audit is not required as Govt. Scraps GST Audit and filing of 9C Requirement.

4. GST Annual return may include a self-certified reconciliation statement reconciling the value of supplies b/w GST returns and audited annual financial statement

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5. Interest on delayed payment of GST shall be payable on that portion of GST which is paid in cash

6. Recovery of GST when registered person filing GSTR-1 not GSTR-3B in any of following modes

  • By detaining and selling the goods belonging to defaulter or
  • Recovery from any other person who owes money to defaulter or
  • Attachment of immovable property belonging to defaulter

7. Seized or detained goods shall be released on payment of following penalty :-

  • Where the owner of goods comes forward – penalty equal to 200% of tax payable
  • Where the owner of goods does not come forward – penalty equal to 50% of the value of goods
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8. Where a person fails to pay penalty within 15 days, goods shall be sold or disposed and conveyance (truck, etc) shall be released on payment of a penalty of Rs 1 lakh whichever is less

9. New section 151 proposed where Commissioner or any officer authorized by him direct any person to furnish information relating to any matter dealt with in connection with GST act.

10. Exporters liable to deposit the refund received along with interest in case of non-receipt of sale proceeds within the time limit prescribed under the Foreign Exchange Management Act, 1999

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Budget 2021 Expectations: Taxpayers want the old income tax regime to continue

In the last year’s Union budget, Finance Minister Nirmala Sitharaman proposed a new income tax regime that included seven tax slabs – Nil, 5%, 10%, 15%, 20%, 25%, and 30% – compared to four tax slabs under the old income tax regime – Nil, 5%, 20%, and 30%. Both tax regimes will proceed and it will be optional for taxpayers to pick a regime.

Since the new income tax system has lower income tax rates between Rs 5 lakh and Rs 15 lakh, there will be no tax exemptions and deductions will be available in the regime.

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As a result, the existing benefits of Rs 5 lakh in the form of exemptions and deductions applicable under different provisions of the old income tax system will be lost to the salaried taxpayer by moving to the new income tax regime.

Under the old income tax system, taxpayers are entitled to a deduction of Rs 2 lakh u/s 24 of the Income Tax Act on interest charged on home loans in the financial year. In addition, an extra tax gain of up to Rs 1.5 lakh is also applicable to U/S 80EEA of the Income Tax Act, if the interest is charged on a home loan taken to purchase an affordable home, subject to certain conditions.

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Apart from the interest on the home loan, a typical salaried taxpayer will also lose the benefits of the HRA exemption, Standard Deduction, which amounted to Rs 50,000 in the financial year (FY) 2019-20, deductions u/s 80C to Rs 1.5 lakh, deductions up to Rs 50,000 u/s 80CCD(1B) on voluntary contributions to the Tier-1 accounts of the National Pension Scheme (NPS), deductions of up to Rs 75.000 u/s 80D on the health insurance premium paid for self-employed individuals and their family, as well as the premium paid for senior citizens’ parents or the costs incurred for their treatment.

So, taxpayers hope that the Finance Minister will continue to enforce the old income tax system as an optional one this year and in the future as well.

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