Source: Tavaga Research
Income tax has always been the most contentious part of the Union budget as it pertains to each one of us who are earning.
This year, the expectations around relief in the form of rate cuts have resulted in revised tax slabs classified now as Section 115BAC. But they come with a catch. Those availing the new tax slabs will not be able to claim as many as 70 of the 100 exemptions that were allowed in the earlier tax regime, including the popular 80C investments.
The scrapping of deductions is also the reason why the government has made this a unique measure — it is optional. We may choose to either go with the new regime without exemptions or the old one with it.
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The minimum income exempted from income tax has been raised from Rs 2.5 lakh to Rs 5 lakh.
The new income tax rate slabs are as follows:-
The older regime’s income tax rate slabs are as follows:-
What happens now
For example, if we earn Rs 15 lakh, we would be required to pay Rs 1,95,000 as income tax, compared to the earlier regime’s Rs 2,73,000.
The above-proposed slabs are for those who would not avail of tax exemptions.
Some of the deductions scrapped under the new lower tax regime are:-
There is also a choice for us to follow the old regime of tax rate with exemptions.
The exemptions were done away with in order to simplify the tax-filing process so we don’t have to take the help of advisers, according to the Finance Minister. The move is also in line with this government’s stated intent of reducing tax rates while removing tax exemptions.
Of course, the reduction is expected to lead to a growth in private consumption, which wallowing at 5.8 percent growth, is in dire need of a boost for the sake of the economy.
The personal tax reduction will cost the government Rs 40,000 crore in revenue. The salaried segment brings in close to 60 percent of the gross total income from individuals including those earning from business, capital gains, property and other sources.
The stocks of insurance providers and housing loan providers have taken a hit as the personal tax exemptions are made optional. The deductions under 80C and on housing loans used to play a considerable part in their appeal to the tax-payer. Many of us would go for multiple insurance products to seek exemptions in a fiscal or opt for a home loan even if we could pay in cash for a home.
The government has decided to do away with DDT (dividend distribution tax). It is the tax paid by the company before distributing any dividends to its shareholders.
But there is a catch. Now the party receiving the dividend is liable to DDT. The rate of DDT was 20.35% (including cess and applicable surcharge). Through DDT the govt has collected Rs 41,000 crores each in the year of 2016-17 and 2017-18. Rs 25000 crore of revenue would be foregone with the abolition of DDT.
With DDT being scraped the government has to cover up the revenue foregone through other sources.
Corporate Tax and Business environment
FM says a stable and predictable business environment is key for the government. Contracts Act will be strengthened to ensure that all contracts are honored, says Nirmala Sitharaman.
Nirmala Sitharaman said that there is a need to reduce direct tax litigation. A total of 4.83 direct tax cases pending in various forums. So a new direct tax dispute settlement under ‘Vivad se Vishwaas Scheme’ will be launched.
No penalty will be charged if taxpayers pay by March 31, 2020. Here, only the disputed tax amount has to be paid.
Also, the corporate tax cuts will be extended to the electricity companies as well.
Fiscal deficit guidance has been revised to 3.8% of GDP for FY 2019-20 from 3.42% earlier. The earlier target of 3.42 has already been breached to 132% of the target. In order to generate revenue, the government has planned to sell the remaining stake in IDBI Bank. The government has also proposed some of the sale of a stake in LIC via IPO (Initial Public Offer). The fiscal deficit has been brought down from 4.1% of GDP in 2014 to 3.42% of GDP in 2019. Indian economy stumped with slow growth and high inflation has certainly added to the fiscal deficit. For the FY 2020-21, the government has pegged the fiscal deficit target to 3.5% of GDP. Capital Expenditure for FY 20-21 is estimated at Rs 30.42 lakh crore. While the receipts are estimated at 22.46 lakh crores. Keeping the fiscal deficit in check will be very tough by the government as the income tax rates are slashed and will result in the lower collection of direct tax. The proposed stake sale of LIC and IDBI Bank can help to generate some income for the government. However, given the current situation of the economy, a rise in fiscal deficit number should be gladly accepted by the investors as this spending will lead to a revival of the economy unless they are spent on non-productive purposes.(For more discussion on fiscal deficit the readers can refer to A Tightrope- Walk With Fiscal Deficit)
Overall, all the positives have been discounted in the market and at the same time, it should not be surprising if the government decides to not tweak all the taxes at the same time and decides to with one rate cut at one time.
Long term capital gain tax was abolished in 2005 in order to attract more investment in capital assets. But again in Budget 2018 it was reintroduced at the rate of 10% on any capital gain of Rs 1,00,000 or more where holding period is more than one year. Since then it has been a roller coaster ride for the market participants, be it a domestic investor or FII (Foreign Institutional Investor). LTCG on real estate is imposed at 30% on any gain on the sale of the property if the gain is not invested in real estate within three years.
LTCG not scrapped, tenure not changed
The FM has decided to not do away with LTCG tax. The modification of tenure defined under LTCG was also on cards. No attention has been paid to LTCG in the budget. Dalal Street is not happy as the CNX Nifty tanked 300 points and Bank Nifty tanked more than 1000 points. 30% tax on a gain of the sale of any real estate has also not been scrapped which was also expected. All in all, no benefit has been awarded to long term investors
Not removing the LTCG tax should not come as a surprise to investors. The fiscal deficit is already widening and scraping of LTCG tax would have led to more widening of the deficit.
Agricultural and infrastructure reforms
The Finance Minister enunciated the need for liberalising the farm market to ensure the farmers received the rightful income and the need to remove distortions from it. Afterall, it accounts for 18 percent of the GDP of India.
With a 16-point plan, the Budget 2020 hopes to work on a holistic improvement for the farm sector — production, purchasing, marketing, logistics, livestock, apiary and fishery, alternate non-crop income for the off-season, and technology integration. The aim is to double farm income by 2022.
One of the key challenges has always been access to credit in rural India, at times taking a toll on its consumption. The budget nudges NBFCs, cooperative banks and Nabard to provide quick, easy and affordable credit/finance to the farmers as a sum of Rs 15 lakh-crore in agri-credit would be made available.
Village-level storage of seeds, steered by women help groups, would be encouraged with Nabard’s assistance as well, for farmers to access when in need. A balanced use of fertilisers (over chemical-only) will be spurred with lower incentives on chemical fertilisers.
Both the Indian Railways and civil aviation ministry would be roped in to facilitate logistics of perishable goods so farmers don’t suffer income-loss due to delays and spoilt produce.
As many as 2 million farmers will be chosen for installation of solar farms and 1.5 million would be helped to solarise their on-grid irrigation pumps.
The agriculture, allied and irrigation measures will see the government spend Rs 1.6 lakh-crore and the other rural development and Panchayati Raj initiatives will get Rs 1.23 lakh-crore.
Other infrastructure spends
The ambitious National Infrastructure Pipeline with an allocation of Rs 103 lakh-crore will modernise logistics, road and other transport networks, overhaul housing, provide potable water, and focus on green energy.
It was divulged that as much as Rs 22,000 crore has already been made available to the scheme for spending.
The NIP is expected to drive investments, job-creation and act as a key growth booster, for the government is in a race to make India a $5-trillion economy by 2024-25, and working against a slowdown.
The FM said, “The NIP will improve the ease of living for every citizen, there is a huge employment opportunity in construction, operation, and maintenance of projects.”
There is an additional Rs 1.7 lakh-crore for the transport sector next fiscal.
The government has planned to spend, between 2020 and 2025, nearly 70 percent of its capital expenditure on sectors such as energy (24%), roads (19%), urban development (16%), and railways (13%).
FY21 has seen the allocation of Rs 273 billion ??? for developing the commerce industry, which was expected.
There would be 100 new airports by 2024.
An outlay of Rs1,480 crore would go towards a National Technical Textiles Mission, generating jobs and formalising the sector.
A fund of Rs 4,400 crore was made to egg state governments to implement clean air policies as most of urban India feature among the most-affected with air pollution.
Besides a boost to farm solar plants, the space alongside railway tracks would also see large solar power plants being set up for greener energy.
The absence of sops for the realty sector, suffering from sluggish demand has disappointed the street. The only concession is the exemption of builders’ income tax.