Expenditure: The government proposes to spend Rs 30,42,230 crore in 2020-21, which is 12.7% higher than the revised estimate of 2019-20.
Receipts: The receipts (other than net borrowings) are expected to increase by 16.3% to Rs 22,45,893 crore, owing to higher estimated revenue from disinvestments.
GDP growth: The government has assumed a nominal GDP growth rate of 10% (i.e., real growth plus inflation) in 2020-21. The nominal growth estimate for 2019-20 was 12%.
Deficits: Revenue deficit is targeted at 2.7% of GDP, which is higher than the revised estimate of 2.4% in 2019-20. The fiscal deficit is targeted at 3.5% of GDP, lower than the revised estimate of 3.8% in 2019-20. Note that the government is estimated to breach its budgeted target for fiscal deficit (3.3%) in 2019-20 and the medium-term fiscal target of 3% in 2020-21. This does not include off-budget borrowings (0.9% of GDP in 2020-21).
Ministry allocations: Among the top 13 ministries with the highest allocations, the highest percentage increase is observed in the Ministry of Communications (129%), followed by the Ministry of Agriculture and Farmers’ Welfare (30%) and the Ministry of Home Affairs (20%).
Tax proposals in the Finance Bill
In addition to changes in tax laws, the Finance Bill, 2020 also proposes certain non-tax changes to the Prohibition of Benami Properties Transactions Act, 1988.
Change in income tax rates: The income tax rates have been changed. Table 1 below compares the current tax rates with the proposed tax rates. Note that the new personal tax rates are optional and may only be availed if the person satisfies certain conditions, such as if they do not claim certain exemptions or deductions. These include standard deductions, leave travel allowance, house rent allowance, interest payment on housing loan, and deductions under Chapter VI-A (investments in provident fund, insurance premium, donations to charities, etc.). Once the option is exercised, it will be applicable for all subsequent years.
Option for lower tax rates: The Income Tax Act was recently amended to give an option to domestic companies to avail of 22% tax rate if they did not claim certain deductions. The list has been expanded to include other deductions, such as those under Section 80G (donations to charities). Also, a similar facility has been provided to co-operatives.
Benefits to corporates: Currently, domestic manufacturing companies have an option to pay income tax at the rate of 15% if they do not claim certain deductions under the Act. This benefit has been extended to domestic companies engaged in electricity generation.
Dividend Distribution Tax: Currently, companies have to pay a tax of 15% on dividends distributed by it to shareholders. This has been removed and the dividend income will now be taxable in the hands of the recipient.
Limit on deductions for social security contributions: Currently, there is no combined limit for the purpose of deductions on the amount of contribution made by an employer towards a recognised provident fund, an approved superannuation fund and the National Pension Scheme. A combined ceiling of Rs 7.5 lakh is being introduced on deductions which may be claimed towards such contributions.
Residence in India: The Income Tax Act, 1961 specifies various conditions for determining the resident status of an Indian citizen or a person of Indian origin. A person will be considered a resident, i.e. their global income is taxable in India, if they are in India for more than 182 days. This has been reduced to 120 days. In addition, any Indian citizen who is not liable to tax in any other country or territory by reason of domicile or residence shall be deemed to be a resident of India.
TDS on e-commerce transactions: TDS of 1% will be levied on e-commerce transactions.
Housing incentives: Currently, an exemption is provided on profits or gains arising out of building affordable houses if the project was approved by March 31, 2020. Further, an additional tax deduction of up to Rs 1,50,000 is provided on interest paid on loans for self-occupied house owners if the loan was sanctioned by March 31, 2020. The deadline in both cases has been extended to March 31, 2021.
Tax changes for start-ups: Start-ups are allowed to get a full tax waiver on profits for any three consecutive years out of their first seven years, if they are incorporated between April 1, 2016 and March 31, 2021, and their turnover does not exceed Rs 25 crore. The waiver has been extended to start-ups for any three years out of their first ten years. In addition, the turnover threshold has been increased from Rs 25 crore to Rs 100 crore.
Further, the tax on ESOPs (stock options) held by employees of start-ups will be payable only on the earliest of the following events: (i) expiry of 4 years from the end of the assessment year, (ii) sale of the options, or (iii) till the employee leaves the company.
Excise: The rate of central excise duty on certain tobacco products such as cigarettes, chewing tobacco, and tobacco extracts has been increased. For example, the rate of duty on chewing tobacco has been increased from 10% to 25% per kg. Further, crude petroleum has been included at a rate of duty of Rs 50 per tonne.
Customs: Customs duty has been raised on some items such as tableware and kitchenware, footwear, fans, and toys.
Health cess on customs: A health cess will be levied (in addition to customs duty) on certain medical devices, such as X-ray machines, imported into India. This cess may be utilised for the financing of health infrastructure and services.
Obligations on charities: Charitable organisations get an exemption from taxation under Section 12AA, and donations to them get exemptions under Sections 10(23C), 35, and 80G. From now, the approvals under these sections will be valid for a maximum of five years. Any entity having these approvals has to get them re-issued.
Commodities Transaction Tax: Currently, the commodities transaction tax on commodity derivatives is 0.01%. The Bill creates three tax rates: (i) 0.01% payable by the seller on sale of commodity derivatives based on its price or price index, (ii) 0.0001% payable by the buyer on the sale of an option in goods resulting in the delivery of the goods, and (iii) 0.125% payable by the buyer on the sale of an option in goods resulting in cash payment.
Indian Stamp Act, 1899: Stamp duty will not be charged in the case of transactions in stock exchanges and depositories established in international financial centers set up under the Special Economic Zones Act, 2005.
Sovereign wealth funds: Income arising out of investments made by the Abu Dhabi Investment Authority and other notified sovereign wealth funds in certain infrastructure facilities will be exempt from tax. This exemption is available if the investment was made before March 31, 2024, and with a minimum lock-in period of three years.
The Prohibition of Benami Property Transactions Act, 1988: The Act constitutes an adjudicating authority on issues related to benami properties. The qualifications for the chairperson and members of the authority are that they must have been: (i) a member of the Indian Revenue Service as Commissioner of Income-tax or equivalent, or (ii) a member of the Indian Legal Service as Joint Secretary or equivalent. The Bill states that an individual qualified for the position of District Judge may also be the chairperson or a member of the authority.
Removal of tax exemptions on certain allowances: Certain exemptions on facilities to current and former members of the Union Public Service Commission and the Election Commission such as rent-free residence, conveyance allowance, and medical facilities are exempt from tax. This exemption has been removed.