Budget FY 2020–21 was presented against the backdrop of consistent weak growth for the last 8 consecutive quarters wherein the GDP growth rate has persistently dipped. Concerns leading to subdued spirits in the economy have not been limited to a single sector. Moreover, the tax collections for FY 2019–20 from corporate tax, income tax, GST, etc. have been the weakest in a decade. So, the overarching pressure is to contain fiscal deficit, which is spiralling to 3.8% of GDP for FY21. Given this, the space for spending for FY21 is rather limited.
This year’s budget, therefore, focuses on opening up capital markets and making some changes to the tax structure. With regards to this, a few key proposals made by the Finance Minister are:
- Increased FPI limit for corporate bonds: To promote greater participation by the Foreign Portfolio Investors (FPI), the Government proposed to increase the investment limit for them from 9% to 15% of outstanding stock of the corporate bonds.
- Abolition of DDT in the hands of the company: Dividend Distribution Tax (DDT) has been removed from the companies and moved into the hands of recipients. Currently, as per section 115o of the Income Tax Act, an additional tax of 15% (plus surcharge and cess) is required to be paid on any amount declared, distributed or paid as a dividend by domestic companies. Such dividend income is exempt under section 10(34) of the Act in the hands of the shareholders.
- Significant changes in the income tax structure: While tax rate has been cut in lower income slabs up to ₹15 lakh, standard deductions have been taken away in a bid to simplify the tax structure. As per the finance minister, this will result in ₹400bn of tax revenues being given up. Further, increasing the deposit insurance from ₹0.1mn to ₹0.5mn is a step towards protecting the small saver.
- SWF investments in infrastructure: 100% tax exemption on income on investments (dividend, interest, capital gains) in the infrastructure sector by Sovereign Wealth Funds (SWF) was proposed in the Union Budget. This is likely to boost the infrastructure sector by facilitating the much-needed capital.