Presented against the backdrop of a global recessionary trend and continued geo-political uncertainties, India’s budget for the next fiscal focuses significantly and rightly, on domestic growth drivers. The biggest plus is the continued push for the government’s capital expenditure. With 33% capex growth planned in FY24, taking the total outlay to INR10 trillion, it will be a game-changer for crowding in private sector investments. Together with the grants to the States to increase their capex, the effective capital expenditure is estimated at 4.5% of GDP in FY24. The multiplier impact of such investments can be substantial.
The government has managed the increased outlays while firmly adhering to the fiscal consolidation path, which is commendable. It envisages a near 10.5% increase in gross tax revenue in FY24 (BE) against FY23 (RE), assuming 10.5% nominal GDP growth in FY24. This implies a tax buoyancy of 1. The government has again been conservative about the nominal GDP and the actual tax collections may be higher than budgeted.
On the tax front, the key development is making the concessional tax regime (CTR) the default option and leaving more in the hands of citizens, thereby targeting greater consumption and, in some cases, channelising investments. It is expected that unless the taxpayers are benefitting from house rent allowance deductions and other benefits substantially, the move is likely to encourage people to embrace the CTR. This is also in line with global trends to simplify personal tax compliances while allowing for simple standard and pension deductions. However, no deduction under the CTR for medical insurance payments could disappoint many taxpayers. The removal of the highest surcharge of 37% also brings the maximum tax rate down to 39%. The budget also focuses on rationalising large ticket benefits. Capital gains savings from investing in residential properties have been capped at INR10 crores.
The above measures strike a fair balance between simplification, rewarding taxpayers with concessions while capping benefits such that they advance the distributive ideology of the government.
Policy support has been a great enabler for the start-up ecosystem so far. However, while raising capital from foreign investors, private companies, including start-ups, will now need to be mindful of the fair value to avoid tax implications.
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Considering the significant push on the infra sector, there was an expectation that the sunset date for concessional tax rate benefit of 5% on interest on external commercial borrowings, rupee denominated bonds and debt investments by FPIs would be extended beyond the present 30 June 2023. An extension could have augmented the generous government capex outlay with foreign debt capital. There was also an expectation that the capital gains tax regime would be simplified however this may be looked at later given the government’s focus on minimal changes.
GIFT IFSC (International Financial Services Centre) is a key government initiative and saw several policy announcements in this budget as well. The proposal to set up a single window IT system for registration and approval under the IFSC regime will go a long way in promoting ease of doing business from GIFT IFSC. To promote issuance of derivative contracts by IFSC banking units, the Finance Bill proposes to amend the Securities Contracts Regulation Act. Offshore Derivative Instrument (ODI) contracts issued by a Foreign Portfolio Investment (FPI) in the IFSC shall also be legal and valid. While income of non-residents on transfer of ODI entered into with an IFSC banking unit is exempt from tax, it is now proposed that a similar exemption be provided to any income distributed on the ODI entered into with an IFSC bank, which fulfils prescribed conditions.
The Finance Minister has done a fine job of presenting a balanced budget in view of many considerations, especially given the general elections in 2024. The emphasis on capex-led growth, combined with tech-enabled empowerment of all deserving sectors, is indeed the right strategy to propel India into Amrit Kaal.
Rajiv Memani is Chairman and CEO - EY India. Sameer Gupta, National Tax Leader – EY India, contributed to this piece
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
