Union Finance Minister Nirmala Sitharaman on Saturday slashed income tax for individuals, abolished dividend tax for companies and announced record spending in agriculture and infrastructure sectors to pull the economy out of its worst slowdown in more than a decade.
The cut in income tax rates, which would help save Rs 1,820 to Rs 20,300 a year in tax for persons with annual income of above Rs 10 lakh, was however conditioned on foregoing current exemptions and deductions, including standard deduction for Rs 50,000 as well as the waiver earned on payment of up to Rs 1.5 lakh in tuition fee of children, and contribution towards insurance premium and provident fund.
She raised import duty on a variety of products ranging from tableware and kitchenware to electrical appliances to footwear, furniture, stationery and toys to boost domestic manufacturing while at the same time provided funds to help farmers set up solar power generation units and set up coal storages to transport perishables.
Alongside, the limit of insurance cover in case of bank failure on deposits was increased to Rs 5 lakh from Rs 1 lakh and a sale of government stake in the country’s largest insurer Life Insurance Corporation announced.
The stock market, however, reacted negatively as the benchmark Sensex suffered its biggest single-day loss in over a decade on concerns over lack of growth boosting measures and fiscal discipline.
Commenting on the budget, Prime Minister Narendra Modi said the budget will accelerate the economic growth, financially empower every citizen and strengthen the foundation of the economy in the new decade.
Heaping praise on it for having both “vision and action”, he said provision of faceless appeal, new and simple structure of direct tax, move towards unified procurement system, stress on disinvestment are some of the steps which will reduce the government out of people’s lives and will enhance their “ease of living”.
Presenting her second budget in Parliament, Sitharaman said the 2020-21 budget was aimed at boosting incomes and enhancing purchasing power, stressing that the economy’s fundamentals were strong and inflation was well contained.
For farm and rural sectors, she allocated Rs 2.83 lakh crore and fixed Rs 15 lakh crore target for giving agriculture credit. Another Rs 1.7 lakh crore spending was planned for transport infrastructure and Rs 40,740 crore allocation was made for the energy sector.
In doing so, the government will miss its deficit target for the third year in a row, pushing shortfall to 3.8 per cent of GDP in the current fiscal as compared to 3.3 per cent previously planned. The fiscal deficit target for the coming fiscal year starting April 1 has been fixed at 3.5 per cent.
Sitharaman, who cut tax paid by companies to its lowest in September last year, proposed new tax slabs of 15 per cent and 25 per cent in addition to the existing 10 per cent, 20 per cent and 30 per cent. The new slabs would be for individuals not availing certain specified deductions or exemptions.
Under the proposed I-T slab, annual income up to Rs 2.5 lakh is exempt from tax. Those individuals earning between Rs 2.5 lakh and Rs 5 lakh will pay 5 per cent tax. A 10 per cent tax will be charged on income between Rs 5 and 7.5 lakh, 15 per cent, 20 per cent and 25 per cent on next Rs 2.5 lakh each and 30 per cent on income above Rs 15 lakh.
“Currently, annual income up to Rs 2.5 lakh is exempt from income tax. While a 5 per cent tax is charged for income between Rs 2.5 and 5 lakh. 20 per cent for income between Rs 5 lakh and Rs 10 lakh and 30 per cent for those earning above Rs 10 lakh.
“The new tax regime shall be optional for taxpayers,” she said.
Sitharaman accepted the demand of the industry to reverse the taxability of dividends back to the recipients, making equity investment more attractive. Now, dividends will be taxed in the hands of recipients, a move that will cause Rs 25,000 crore dent to her coffers.
Also, she deferred taxes for ESOPs in the hands of employees which will be an important decision for the employees to own shares in the employer without getting worried about organising cash to pay taxes. This will also provide greater flexibility to the employers and employees in the structuring of their employment prospects.
One proposal that could be become contentious was tax being imposed on Indian citizens abroad if they are not taxable in their home country.
For the next fiscal, she pegged net borrowings of Rs 5.45 lakh crore and doubled target of raising revenue from the sale of government stake in PSUs to Rs 2.1 lakh crore.
The budget commits to increasing the expenditure by 13 per cent in 2020-21 with increased allocations for education, health and certain schemes in the agricultural sector.
Private trains, better connectivity to tourist sites, solar power to fuel the rail network and transportation of perishables, Sitharaman has proposed a blueprint for the railways in the budget to be implemented with a budgetary support of Rs 70,000 crore.
In 2019-2020, the budgetary support was revised to Rs 69,967 crore.
Continuing with its expansion plans, the Railways’ capital expenditure is pegged at Rs 1.61 lakh crore for 2020-21, which is three per cent higher than the previous year’s capex of Rs 1.56 lakh crore.
The gross budgetary support for the railways is pegged at Rs 5,21,608 crore.
In her budget speech, Sitharamam said the Indian Railways will set up a “Kisan Rail” through the public private partnership mode with refrigerated coaches for transportation of perishable goods to assist farmers.
But experts said this expenditure increase, coupled with the income tax cuts, does not seem to suggest a large fiscal stimulus that the current slowdown perhaps warranted.
She offered tax breaks to foreign investors and specifically those like sovereign wealth funds who are willing to place a long-term bet on the economy acknowledge.
Moody’s Investors Service said the budget highlights the challenges to fiscal consolidation from slower real and nominal growth, which may continue for longer than the government forecasts. “This risk is reflected in Moody’s negative outlook on India’s rating.”
India’s general government debt is already significantly higher than the average for Baa-rated sovereigns – a product of persistent fiscal deficits, it said adding that while India’s new budget calls for a modest narrowing of the deficit to 3.5 per cent in the fiscal year 2020/21 from 3.8 per cent in the fiscal year 2019/20, sustained weaker growth and tax cuts would make gross revenue targets difficult to achieve.
“The government also has limited room to reduce expenditures without further weakening growth,” it said.