Another budget and another similar pattern - very few things on taxation, especially the Old income tax regime, but expanding even more on infra - physical as well as digital - with another steep rise in Govt Capex. There are a few changes on the New tax regime front too, which we will try to cover in the later part of this article, with an example too.

Key Highlights:

Once again, these measures are aimed to build upon the foundation laid out in the previous budget, as we move towards India@100.

• 4 key opportunities have been identified, as focus areas in this journey - Economic empowerment of women, PM VIKAS (development of artisans to suit current needs), Tourism, Green growth.

• 7 priorities of the budget - Inclusive Development, Reaching the Last Mile, Infrastructure and Investment, Unleashing the Potential, Green Growth, Youth Power, Financial Sector.

Physical Infra, renewable focus:

• An Urban Infrastructure Development Fund (UIDF) will be established to create urban infrastructure in Tier 2 and Tier 3 cities.

• On urban sanitation - All cities and towns will be enabled for 100% mechanical desludging of septic tanks and sewers to transition from manhole to machine-hole mode.

• 13 GW renewable energy capacity in Ladakh will be integrated on grid for inter state transmission, with a central govt expenditure of INR 8,300 crore.

• A Green Credit Programme will be notified under the Environment (Protection) Act, to incentivize environmentally sustainable and responsive actions.

Digital Infra:

• An open source, open standard, interoperable digital public infrastructure for agriculture will be built. This, combined with an Agriculture Accelerator Fund to be set up, will help bring in technology to improve farming practices and help farmers increase productivity and profitability.

• A computerization of Primary Agricultural Credit Societies is initiated with an aim to build a national co-operative database. Aim is to decentralize the storage capacity, to improve storage of farm produce and help farmers get a better pricing for their produce.

• Setting up of a National Digital Library, with device agnostic accessibility.

• A tourist experience App to be launched, covering various aspects like tourist safety, physical connectivity, local guides etc. about the destination. Atleast 50 such destinations to be identified initially.

• National Data Governance Policy is announced to allow anonymized access to data.

• A simplified, risk based KYC process to be adopted. Financial sector regulators to also review the KYC process to align with the Digital India initiative.

• Digilocker service and Aadhar to be relied on as a core source to have a single place for citizens for updating their identity and address. Scope of documents stored in Digilocker will be expanded to enable Fintech innovative services.

• A national financial information registry will be set up to serve as the central repository of financial and ancillary information. A new legislative framework will govern this credit public infrastructure, and it will be designed in consultation with the RBI.

• PAN will be used as the common identifier for businesses, for all digital systems of specified government agencies. This will be done as a legal mandate, to improve ease of doing business.

• A Unified Filing Process will be introduced for filing forms and returns with various government agencies, at a single place.

Economic performance:

• Capital expenditure was announced to the extent of a staggering 10 lakh crores - which is almost 3x the expenditure announced in FY 2019-20, and a 33% increase over previous budget.

• Capital expenditure on Railways is 2.4 lakh crores.

• Fiscal deficit for FY 2022-23 stands at 6.4% of GDP and is estimated to be at 5.9% of GDP for FY 2023-24. In line with the previous budget announcement, we are on track to achieve the Fiscal deficit target of 4.5% of GDP, by FY 2025-26.

Tax changes:

• Number of basic customs duty rates on goods, other than textiles and agriculture, reduced from 21 to 13, for a simplified tax structure.

• National Calamity Contingent Duty (NCCD) on specified cigarettes to be increased by ~ 16%.

• Surcharge on income exceeding INR 5 Crore is now reduced for 37% to 25%. This will bring down the maximum tax rate from 42% to 39%. Though this change applies only in the New tax regime.
  

• Tax free leave encashment limit for non government, salaried employees increased from INR 3 lakhs to INR 25 lakhs.

• New tax regime to be the default tax regime. To clarify, this is not mandatory. Individual & HUF Assessees who do not wish to be taxed under this regime, can opt for the old regime.

• Deductions under sections 54 to 54F, for long term capital gains, to be limited to INR 10 crore.

• Thresholds for opting for presumptive taxation increased from INR 2 Crore to INR 3 crore for businesses and INR 50 lakhs to INR 75 lakhs for specified professions.

• Insurance payouts (other than in case of death), for insurance policies (Other than ULIPs) where aggregate premium paid on the policy exceeds INR 5,00,000, shall be taxed. It will not be treated as an exempt income under section 10 (10D) anymore.

Details of changes under New tax regime:

A relief in tax will be available to assessees with total income up to INR 7 lakhs (up from INR 5 lakhs earlier). This means that any tax payable on total income up to this limit, will be provided as a rebate and the assessee will not have to pay any tax. And on a side note - this means that an Income Tax Return still needs to be filed.

Further, this increased limit is applicable only under the new tax regime. It continues to be INR 5 lakhs, under the old tax regime.

Standard deduction from Salary income of INR 50,000 will be allowed under the new tax regime as well.

All other deductions continue to be disallowed. Please refer to our 2020 Budget analysis here for details.

Revised slabs under new regime only:

To put this in perspective with Old regime slabs and existing new regime slabs, we have the below comparison:

As soon as we include deductions up to INR 3,75,000 in any form in the above table, the new proposed slabs in the new regime becomes neutral. Any more deductions than this, would mean that even the new slabs in the new tax regime are not beneficial to the assessee. These aspects need to be factored in when making the selections for FY 2023-24.

Conclusion (Our view):

Probably the measures on the personal income tax front may appear to be bit of a disappointment and one would expect them to make the New income tax regime more attractive. This could take some time as the regime is quite new and we are confident that we will see changes based on industry feedback.

However, like all previous budgets, the government is continuing its push towards more and more infra development, along with an attempt to improve the ease of compliance through various measures.

It is a growth oriented budget, with a clear path laid out to move towards the goal of becoming a developed country, while at the same time, continuing on a path of fiscal consolidation to strengthen the economy.

Footnotes:

1. Links to Budget Speech, Budget memo, Finance bill.

2. For any queries/feedback/suggestions, feel free to reach out to us at help@ayanshfinsights.com, or drop us a message/chat/call on our number: +91 93220 27741.

   If you wish to avail any of our services, you can view Our Offerings.

You may have noticed the slabs given at the top of this page - yes, these still apply. Read on to find out how.

Another budget and we are here with another analysis on the budget. And like always, we will focus mainly on direct tax items and other marquee announcements.

Our first impressions - the budget looked to continue with the structural reforms that have been getting announced in recent times, including easing of taxpayer compliances. So much so that they have introduced a new section 119A in the Income Tax Act, to notify a Taxpayer’s charter, which shall be adopted by the CBDT in some time.

However, we feel that the execution, especially of the idea of simplification of personal income tax - of reducing the deductions / exemptions and reducing the tax rates, could have been better. We shall cover the key highlights first, and then explain why we feel so.

Key Highlights:

• Corporate tax cut in Sep 2019: As most readers would be aware by now, there was a structural change in September 2019, in the way corporations are taxed. The corporate tax rate for new companies in the manufacturing sector was slashed to 15%. This concessional rate is available for companies that start their activities on or before 31 March 2023. For the existing companies, the tax rate is 22%. This reduced rate will be applicable for companies that do not avail any other exemptions / deductions as specified. Such companies will also be exempted from the Minimum Alternate Tax provisions.

• On similar lines, the tax rate applicable for co operative societies has been reduced to 22% to ensure that they have a tax burden at par with corporates.

• There is a similar thought process attempted in the current budget, on the Personal Income Tax front - there are concessional tax rates available for assessees who are willing to forgo of some of the specified deductions *.

Below are the revised slabs applicable for assessees willing to 'opt in' for this regime.

* Assessees opting for this scheme will forgo below key items of focus of this article, amongst other items (Refer the footnote 1 for full list verbatim):

A. Deductions / Exemptions:

(1) Leave Travel Assistance (LTA) (Section 10(5));

(2) House Rent Allowance (HRA) (Section 10(13A));

(3) Any other receipts in the nature of reimbursements, other than perquisites (Section 10(14));

(4) Standard deduction of INR 1,500 per minor child whose income has been clubbed in the return (Section 10(32));

(5) Standard deduction from Salary income of INR 50,000 and a deduction of INR 2,500 pa from Salary income (subject to actuals) (Section 16);

(6) Deduction in respect of Interest paid on Housing Loan, taken for Self Occupied Property (or the additional allowable Self Occupied Property) (Section 24 (b) read with section 23(2));

(7) All Chapter VIA deductions (Sections 80A upto 80VV). This includes deductions like Life Insurance and Health Insurance premia, tax saver FDs and Mutual funds, PPF contributions by employee, Savings account interest deduction, deductions towards interest expense on loans availed for affordable housing as well as buying electric vehicles, etc.

(8) However, 80CCD(2) and 80JJAA deductions are still allowed - Employer contribution to NPS and Deduction in respect of employment of new employees.

(Refer below for full list)

B. Loss setoffs will need to be foregone - under the head “Income from house property” with any other head of income.

We shall cover some more analysis on this later on in the article.

• Additional deduction towards interest paid on loan availed for buying affordable house has been extended upto 31 March 2021 (Section 80EEA) - of course, this applies only for assessees continuing under the existing tax regime.

• Measures have been initiated to prefill the income tax return, including pre filling of donation related data, so that an individual who opts for the new regime would need no assistance from an expert to file his return and pay income tax.

• Currently, businesses having turnover of more than INR 1 Crore are required to get their books of accounts audited by an accountant (section 44AB). This limit is now revised to INR 5 Crores. In order to boost less cash economy this limit is applicable only to businesses which carry out less than 5% of their business transactions in cash.

• Dividend Distribution Tax has been removed, and the dividend will now be taxed in the hands of the recipient - important to note here, that till now, Dividend earned on Equity shares of Indian companies was tax free. Henceforth, this will be taxable as per the slab rates.

• As a next step to faceless assessments, faceless appeals are being introduced to further improve transparency in the assessment proceedings and improve ease of compliance.

• A simplified way of sms based filing for nil GST return is also in a pilot mode currently.

• A system of cash reward is envisaged to incentivise customers to seek invoice.

• Deposit insurance coverage is increased to INR 5 lakhs from current INR 1 lakh per depositor.

• Government will also be looking to undertake some key divestments. This includes the balance stake in IDBI Bank via stock exchange and a part of its stake in LIC via the IPO route. Our own view (which may be different for others) is that ideally the government should not be looking to run businesses. They should be facilitators rather than running a business. This is another right step towards that ideal state, and it will also ensure more efficiency in day to day operations of these entities.

Apart from these, there are few other marquee announcements, which are worth a mention here:

• There is an increased focus on use of solar energy which can be seen from some of the measures announced. The PM-KUSUM scheme is being expanded to provide 20 lakh farmers with pump sets linked to solar energy, to reduce their dependence on diesel and kerosene. In addition, a scheme to enable farmers to set up solar power generation capacity on their fallow / barren lands and to sell it to the grid would be operationalized.

• Indian Railways will be setting up a large solar power capacity alongside the rail tracks, on the land owned by the railways.

• Four station redevelopment projects and operation of 150 passenger trains would be done through PPP mode. The process of inviting private participation is underway. And more Tejas type trains will connect iconic tourist destinations.

• It is proposed to provide an outlay of INR 8000 crore over a period of 5 years for the National Mission on Quantum Technologies and Applications.

Dissecting the structural changes to personal income tax regime:

Let us see 2 scenarios, where the assessee has an income of INR 16,00,000 (majorly salary income, to enable factoring in the Standard Deduction), and the availed deductions are as mentioned:

Scenario A: Assessee availing only 80C deductions, alongwith standard deduction:

Scenario B: Assessee availing more deductions:

This shows that in some of the instances, where assessees are claiming lesser deductions, they will have an advantage in the form of tax savings. Else, this new regime is expected to increase the tax liability substantially. However, it is worth noting that this is currently an optional scheme. The assessees not having business income, can make a selection every year. And those having business income, can make the selection only once, and it shall apply for all subsequent years.

Also, as mentioned by the honorable Finance Minister during her ensuing press conference, it is aimed that gradually they will be moving towards this new regime, with lower income tax rates and lower deductions - again in line with simplification of Corporate taxation. There is a high probability of having only 1  option some years from now - of less deductions and less taxes.

Due to these factors, we feel that this particular reform, could have been implemented in a better way. Its intent is clear - to reduce complexity in filing tax returns, however it is not incentivising enough, or at the risk of stating the obvious - disincentivizing for an average taxpayer to adopt this scheme, since more often than not, it may end up increasing the tax burden.

Economic performance:

Lastly, but importantly, the fiscal deficit for FY 2019-20 is revised upwards to 3.8% as against an estimate of 3.3%. This deviation has been taken to accommodate the “structural reforms in the economy with unanticipated fiscal implications” as defined in the FRBM Act - which is nothing but the reforms on corporate and to an extent, personal income tax front.

A return path for fiscal consolidation has been laid out already - including the divestment targets and also partly by achieving a targeted nominal GDP growth rate of 10%. It is important to note here, that Nominal GDP is different from real GDP numbers that are usually seen in the macro data. Real GDP is nothing but Nominal GDP, after eliminating the inflation effect.

Conclusion:

We largely see this budget as a continuation of the intent of the government towards modernising and digitising the economy, and improving the ease of compliances. However, certain aspects of the implementation, like the reform on personal income tax, could have been better. Also, we would like to see some more aggressiveness on the divestment part, and further modernising the railways.

For any queries/feedback/suggestions, feel free to reach out to us at help@ayanshfinsights.com, or drop us a message/chat/call on our number: +91 93220 27741.

If you wish to avail any of our services, you can view Our Offerings.

Footnotes:

1. The total income of the individual or Hindu undivided family shall be computed,—

(i) without any exemption or deduction under the provisions of clause (5) or clause (13A) or prescribed under clause (14) (other than those as may be prescribed for this purpose) or clause (17) or clause (32), of section 10 or section 10AA or section 16 or clause (b) of section 24 (in respect of the property referred to in sub-section (2) of section 23) or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii), of sub-section (1) or sub-section (2AA), of section 35 or section 35AD or section 35CCC or clause (iia) of section 57 or under any of the provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA;

(ii) without set off of any loss,— (a) carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i); (b) under the head “Income from house property” with any other head of income;

(iii) by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed; and

(iv) without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.