Budget 2023: Many hits, few misses as Centre sticks to fiscal consolidation

The target of 5.9% is also likely to be met next year, finally bringing it down to below 4.5% of GDP in the financial year 2025-26

Like every year, the Union Budget was tabled in the Parliament by the Honourable Finance Minister amid great expectations.

India was rightly recognised as a 'bright spot' in an otherwise gloomy world economy in IMF's World Economic Outlook.

The Economic Survey, tabled a day before the Union Budget projected our the gross domestic product (GDP) growth to be around 7 per cent in the current year and just under that for FY 2023-24.

The taxation policy and the consequential amendments are generally governed by a country's fiscal deficit. Thanks to the buoyant tax collections, which have shown a healthy growth of over 25 per cent as compared to last year, the fiscal deficit target of 6.4 per cent of the GDP is likely to be met in the current year. 

Likewise, the target of 5.9 per cent is also likely to be met next year, finally bringing it down to below 4.5 per cent of GDP in the financial year 2025-26. This allowed the government to give certain tax reliefs to both, middle and upper-class. 

The concessional tax regime for individuals having income up to Rs 15,00,000 with six tax slabs has been proposed to be relaxed, whereby five new tax slabs would prevail. Further, the basic tax exemption limit has been increased by Rs 50,000 to Rs 3,00,000. 

This would mean that an individual having a taxable income of Rs 15,00,000 would now have to pay an income tax of only Rs 1,50,000, thereby, yielding an effective tax rate of only 10 per cent. Further, the amount of tax rebate has also been doubled to Rs 25,000, which would mean that an individual with a taxable income up to Rs 7,00,000 would not have to pay any income tax at all. 

For affluents, the peak rate of surcharge has been reduced from 37 per cent to 25 per cent, thereby, limiting the overall peak tax rate to 39 per cent as against 42.74 per cent. 

The Centre has also been quick to plug certain tax planning avenues for this class of taxpayers. For instance, a limit of Rs 10 crore has been introduced with respect to claiming capital gains tax (CGT) exemption while investing in a residential property. Likewise, to curb misuse, the Budget has proposed tax on income from all insurance policies (other than ULIP, which is already taxed) having a premium above Rs 5,00,000 in a year. Other than these, there have been no changes in the tax rates for any class of taxpayers. 

The Budget also extends the sunset clause for granting tax relief to startups by one year i.e., those incorporated up to March 31, 2024, would now be eligible for the tax relief. Further relaxation has been granted with respect to set off losses of such startups, whereby the period of incurrence for allowability of such losses has been increased from seven to ten years from the date of incorporation in case of a change in shareholding. 

MSMEs have also been granted certain tax reliefs. The presumptive tax regime would now apply on a turnover of up to Rs 3 crore as against the current limit of Rs 2 crore, provided the amount in cash received by such taxpayers does not exceed 5 per cent of the total turnover. 

Further, to promote timely payments to MSME, it is proposed that payments made to such enterprises shall be allowed as a tax deduction only on actual payment with the exception that it will be allowed on an accrual basis if the payment is made within the time mandated under the MSMED Act. 

With respect to dispute resolution, an alternate first appellate authority in the form of a Joint Commissioner (Appeals) has been reintroduced to adjudicate upon smaller tax disputes. Although this is a welcome move, re-introducing the 'Vivad se Vishwas scheme', which had witnessed tremendous success in 2020 in its first avatar, would also have been fruitful. Likewise, there was no reference to India’s roadmap for adopting the 'Pillar Two' solution agreed upon in the OECD’s inclusive framework.

However, there are numerous other tax changes proposed in the Union Budget around improving compliance and tax administration, and rationalisation of existing provisions.

Overall, there were no major tax policy announcements, and the government chose to stay on the path of fiscal consolidation by ironing out the creases wherever warranted. The author is Partner at Price Waterhouse & Co LLP