An objective assessment | India's Union Budget

With the common man possibly expecting more relief from rising inflation and reductions in gas cylinder prices, not everyone may immediately and fully grasp the impact of the Union Budget of 2024, presented by Honorable Finance Minister Nirmala Sitharaman on July 23, 2024. Over time, the benefits for individuals, corporations, and the broader economy should become evident, with initiatives like an increase in the standard deduction limit under the new tax regime, a simplified capital gains tax structure, GST amendments, moderated customs duties, equitable allocations to specific schemes and ministries; and a focus on enhancing infrastructure.

The main positives | As I delve into an objective assessment of India’s Union Budget for the fiscal year 2024-25, I see notable positives against the backdrop of a globally uncertain and volatile economic and political climate. Inflation remains relatively low and stable, potentially approaching the 4% target. The planned outlay and revenue from the Finance Minister's proposals aim to reduce the fiscal deficit, currently at 4.9% of GDP, to below 4.5% within the year. Key initiatives have targeted employment and skilling, with a ?2 lakh crore package designed to create opportunities for 4.1 crore youth, and women's welfare, with over ?3 lakh crore allocated to benefit women and girls.

Allocation of payments | The budget's share for infrastructure spending has risen, encompassing investments in transportation, energy, and other vital infrastructure projects. However, major social sector schemes, such as those in education, pensions, and health, have seen similar or reduced budget allocations, with agricultural spending remaining unchanged. Interest payments continue to claim a significant portion of the budget.

The bold GST institutionalization pays off, while reforms continue | The Economic Survey, serving as a precursor to the Union Budget, has recognized the significant role of indirect taxation in the Indian economy. The GST has notably decreased logistics costs, with travel time reduced by 30%. To alleviate the burden of tax disputes, the government has introduced measures that waive interest and penalties on tax demands for the initial years of GST implementation, provided certain conditions are met, covering the Financial Years 2017 to 2020. However, cases of fraud, suppression, or willful misrepresentation are excluded from this relief. Notwithstanding, this in my view, this is a positive step forward.

Infrastructure, real estate, tourism & hospitality will benefit | The establishment of an industrial node along the Amritsar-Kolkata Industrial Corridor, including Gaya, is expected to drive real estate growth in these areas. This will generate demand for both commercial and residential properties, improve connectivity, and stimulate economic activities. Furthermore, transit-oriented development plans for 14 major cities are set to encourage mixed-use developments near transit stations. The budget also proposes the creation of "plug and play" industrial parks in or around 100 cities to attract industrial investments and bolster the demand for industrial real estate.

Upgrading the Vishnupad and Mahabodhi Temple Corridors to world-class pilgrimage and tourist destinations is expected to increase the demand for commercial real estate, including hotels, restaurants, and retail spaces.

Direct taxes could be a mixed bag | In terms of direct taxes, while the ?revised income tax slabs in the new tax regime could enable salaried employees to save up to ?17,500 annually, I have mixed views on the proposed changes in tax on short-term gains on financial assets, which will now be taxed at 20% (up from 15%) and long-term gains on all assets, which will see a tax rate of 12.5% (up from 10%). The removal of indexation benefit on property sale has ignited a fresh debate with the lower tax rate without indexation on unlisted capital assets including property potentially not being beneficial in cases where the annual appreciation is lower than 9-11%. However, sensitivity analysis undertaken for some of the remaining instances seem to suggest that the new tax rate without indexation may actually be beneficial in some of the other cases.

The exemption limit for capital gains on financial assets has been raised to ?1.25 lakh per year, and the angel tax has been eliminated for all classes of investors; both of which are viewed as new benefits. The hike in capital gains tax for listed equity instruments to 12.5% may disappoint investors, as would the proposal to tax buy-back proceeds as dividends, particularly in instances when buy-backs are used for internal restructuring rather than profit distribution.

Customs duty reductions can make some goods cheaper | A notable change in the Budget is the decrease in import duties on gold and silver from 15% to 6%. This is anticipated to increase retail demand and reduce smuggling in the world's second-largest bullion consumer. The Budget also exempts import duty on 25 essential minerals, including lithium, which is vital for electric vehicle batteries. Consequently, solar sets, mobile phones, parts, batteries, chargers, cancer medications, and jewelry made of gold, silver, and platinum, as well as clothing and footwear, are likely to become more affordable. Additionally, X-ray equipment, electric vehicles, lithium batteries, copper, leather goods, fish, fish products, and 25 critical minerals are expected to see price reductions.

The economy is expected to enhance its growth momentum | I see this budget prioritizing inclusive growth and aiming to inject new vigor into the economy, which could well reinforce India's robust ecosystem to position our country as a global growth leader. I also see an intention to reduce disputes and broaden the tax base, with the simplification and rationalization of the tax structure. An effective implementation of some of the measures outlined in the budget could also promote the principle of 'ease of doing business' in India.

The net take-aways | In summary, this budget appears to have been designed to improve urban infrastructure, promote affordable housing and also encourage the growth of the real estate sector in India. While it targets key areas, the success of the proposed objectives will depend on their effective execution and ongoing oversight.

Please do note that MGC Global Risk Advisory is a specialist risk advisory firm, not a tax advisory firm. Consequently, the views shared in this post are my own, potentially generic in nature and based on publicly available information and conversations with fellow professionals and clients. They should not be considered as tax advice. For specific tax-related inquiries, I would be pleased to connect you with one of our member firms that have tax experts to provide their insights and views on the matter you wish to explore.

Sincerely,

Monish G Chatrath