Union Budget 2024 – A Step Towards Viksit Bharat
The Finance Minister, Smt. Nirmala Sitharaman created history on 23rd July, 2024 by presenting the 7th Union Budget in a row. This was also the first budget of the 3rd term of PM Narendra Modi-led government, and therefore, it attempts to lay a road map for the next five years. The budget has identified 9 priorities for sustained efforts towards ‘Viksit Bharat’. In each of the priority areas, sizable allocations are made, and various schemes are announced to achieve the goals. The government must be complimented for keeping the fiscal deficit in check and clearly listing priorities which will keep the growth momentum high.
The budget claims to focus on employment, skilling, MSMEs, and the middle class. Let’s look at some of these focus areas:
THE MIDDLE CLASS
The general perception of the middle class is that the budget has not given enough to them and, in some sense, taken away more than giving. Various schemes announced by the government are beyond the reach of the middle class due to various conditions attached and red tape. Some of the longstanding expectations of the middle class include restoration of travel concessions to senior citizens, exemption of dividend income/long-term capital gains, higher deductions for school fees paid for children’s education, increased standard deductions for salaried employees (at least to take care of their necessities), availability of cheaper credit for homes, good medical facilities at reasonable rates etc. In short, the middle class wants a dignified life and “ease of living”.
INDIA’S MITTELSTAND1
MSMEs constitute 30 per cent of GDP, 45 per cent of manufacturing output and employs 11 crore people2. MSMEs have played a key role in some of the major economies of the world. The budget has announced various schemes, increased allocations and measures for MSMEs. However, the MSME sector continues to face extensive regulation, compliance requirements and significant bottlenecks in funding. “Licensing, Inspection, and Compliance requirements that MSMEs have to deal with, imposed particularly by sub-national governments, hold them back from growing to their potential and being job creators of substance”.3
1. Mittelstand commonly refers to a group of stable business enterprises in Germany, Austria and Switzerland that have proved successful in enduring economic change and turbulence. It is usually defined as a statistical category of small and medium-sized enterprises. [Source: Mittelstand - Wikipedia]
2. Invest India, 2023 (https://tinyurl.com/56393ekz)
3. Economic Survey 2023-24 – Page 159-160
EMPLOYMENT AND SKILLING
India’s workforce is estimated to be nearly 56.5 Crore, of which more than 45 per cent are employed in agriculture, 11.4 per cent in manufacturing, 28.9 per cent in services, and 13.0 per cent in construction4. According to UN population projections, India’s working-age population (15-59 years) will continue to grow until 2044, and for that Indian economy needs to generate nearly 78.51 lakh jobs annually in the non-farm sector to cater to the rising workforce. This will require faster job creation in the non-agriculture sector as the agriculture sector has a lot of disguised employment with low productivity. The alarming facts revealed by the Economic Survey suggest that “Sixty-five per cent of India’s fast-growing population is under 35, and many lack the skills needed by a modern economy5. Estimates show that about 51.25 per cent of the youth is deemed employable6.” In other words, almost 50 per cent of graduates are not employable.
4. Ministry of Health and Family Welfare
5. Helping India build a skilled, inclusive, workforce for the future, World Bank, 2023 (https://tinyurl.com/2tp4xpab)
6. Economic Survey 2023-24 – Page 158
The government is aware of the massive challenges listed above and addressed some of them in the Union Budget, which has many balancing provisions. Many macro-level provisions will further accelerate India’s economic growth and take the country forward towards Viksit Bharat. The private sector and NGOs in social sectors will have key roles to play in addressing some of these challenges.
Turning to the provisions of the Finance Bill 2024, there are mixed responses. Some provisions are good, while some are harsh and need reconsideration. Reduction in the holding period to 12 months from 36 months for qualifying as a long-term capital asset, in respect of a unit of a unit of a REIT / INVIT on which Security Transaction Tax has been paid, is a welcome proposal. An increase in the limit and scope of disclosure of any movable foreign assets under the Black Money Act by a resident individual in Schedule FA of the income-tax return will give some relief to taxpayers. It is important to note that the penalty of ₹10 lakh for failure to disclose the foreign asset is very harsh, as the Assessing Officers are levying separate penalties to each spouse in respect of joint investments and for every year of non-disclosure. Some more concession in the amount of penalties in genuine cases of lapses and joint holdings is the need of the hour. Clarification on tax incidence on gifts by companies will reduce litigation and stop aggressive tax planning. The abolition of the angel tax will give much-needed relief to start-ups and unlisted companies. The reduction of tax rates for foreign companies by 5% is also a welcome change.
However, there are some hard-hitting proposals as well.
REVAMPING OF CAPITAL GAINS
Withdrawal of the indexation benefit for long-term capital gains is viewed as one of the harshest proposals. Even though the impact is sought to be reduced by lowering the tax rate to 12.5 per cent from 20 per cent, there will be some loss to the taxpayers. Moreover, there is no surety that the rate will not be increased in future.
The amendment sought is retroactive in nature, as it will take away indexation benefits for all existing properties. This amendment may encourage understatement of consideration. Over the past decade until 2022, consumer price inflation in India averaged 5.5 per cent7. Indexation is necessary to adjust the reduction in the value of the rupee every year. It is suggested that the proposed amendment may be reconsidered or modified.
7. https://www.focus-economics.com/country-indicator/india/inflation/
It may be noted that non-residents are better placed as no change is proposed to the 1st proviso of section 48 whereby they will continue to get the benefit of computing capital gains on the sale of shares and debentures of an Indian company in the same currency in which original investment was made, which usually takes care of the impact of inflation and changes in interest rates.
BUYBACK OF SHARES
Gross consideration from the buyback of shares is proposed to be taxed in the hands of the shareholder as dividends, and the cost of shares is to be treated as capital loss. This provision needs reconsideration as it will deprive taxpayers of claiming the cost of acquisition if there are no capital gains to offset losses, besides the adverse impact on cash flow due to timing mismatch and the differential tax payable on artificial classification as dividends and capital loss. Alternatively, the cost of acquisition should be allowed as a deduction from the buyback consideration taxable as dividends.
TDS BY PARTNERSHIP FIRMS UNDER SECTION 194T
A TDS @ 10 per cent is proposed on partners’ salaries, remuneration, commission, bonus and interest. No rationale is given for this amendment. This provision will further increase the compliance burden for MSME firms.
When one looks at the Budget Proposals, one gets a good feeling of macro measures towards a ‘Viksit Bharat’ – focus on MSME, Infrastructure, Ease of Doing Business, etc. However, when one looks at the proposals of the Finance Bill, one finds that there is no change in the trend of tinkering with well-settled provisions, retroactive amendments, nullifying court decisions in favour of taxpayers, and increasing tax compliances. Taxpayers are often at the receiving end in complying with TDS provisions, where instead of being rewarded for services to the government, they are penalised even for a venial breach.
May we expect some positive changes while passing the Finance Bill 2024?
Individually and collectively, let us commit ourselves to contribute our might towards ‘Viksit Bharat’ to provide a better and brighter future for our children.
I wish a happy 78th Independence Day to all our readers!
