<p>Budget 2023-24 marked the NDA’s tenth budget and also the last ‘full’ one of the current government. (By convention, election-year budgets are meant to be interim ones.) At a recent joint session of the India CEO and CFO Forums in Chennai, Ketan Dalal, Managing Director of Katalyst Advisors, decoded the Union Finance Budget in the context of India’s economic trajectory and took stock of its main ‘hits’ and ‘misses’.</p><h2>Some Hits…</h2><p>At a 20,000-foot level, the FM did well by committing to reduce the fiscal deficit by 50 basis points, from 6.4% to 5.9% of GDP. She also announced a more modest – and probably achievable – disinvestment target of Rs 510 billion. Another positive was that the capex budget was hiked by 33%, to Rs 10 trillion (3.3% of GDP). Effectively, this means that capital spending in FY24 will be more than twice the FY19 levels (Rs 4.5 trillion). At the same time, the Railways are to receive their highest-ever allocation – Rs 2.4 trillion, or ~9x the level in FY14. This includes substantial capital allocations, enabling faster and better train service. Meanwhile, the allocation to the PM <em>Awas Yojna</em>, which aims to address India’s urban housing shortage while creating thousands of jobs, was increased by 66%, to over Rs 790 billion. The success of all of these initiatives will, however, hinge on implementation, including the ease of bidding for contracts.</p><p>From an ease-of-business perspective, the government is working to reduce the compliance burden through initiatives such as the use of PAN as a common identifier and Aadhaar as the foundation for centralised address updating. India’s ~6.3 million MSMEs, which account for nearly half of the country’s exports, will receive a boost in the form of an additional Rs 2 trillion in collateral-free credit guarantees. This is roughly equivalent to a 1% reduction in borrowing costs. Lastly, an allocation of Rs 350 billion to ‘green growth’ schemes, will go a distance towards facilitating the energy transition and meeting India’s net-zero commitment.</p><h2>…And Misses</h2><p>Against these positives, there were several misses in the FY24 Budget. First, even after the latest rejig, the highest tax rate kicks in at Rs 1.5 million, which is too low. At the other end of the scale, the highest surcharge rate, for earnings in excess of Rs 50 million, has been reduced from 37% to 25%, bringing down the effective tax rate from 43% to 39%. Again, this remains on the higher side. At the same time, Market Linked Debentures (MLDs) are set to lose their preferential tax treatment, with a rate equal to that for other debt investments, regardless of holding period.</p><p>Long-term capital gains deduction on the sale of property has been capped at Rs 100 million, which will impact the sale of high-end residential properties. Moreover, there is ambiguity about the applicability of this provision where there is a time-lag between the sale of a property and the purchase of a new one.</p><p>Income from REITs is typically distributed as interest, dividends, rental income or debt repayment. While income from the first three categories is taxable in the hands of the investor or unit holder, that from the fourth category is not. The latest proposal will, however, tax such income in the hands of the investor under the head, ‘income from other sources’.</p><p>Another issue of concern is the hike in TCS on foreign remittances, from 5% to 20%, with the earlier Rs 0.7 million annual threshold on remittances being removed. The money is refundable, and educational and medical expenses are exempt. Effectively, however, this will cause large sums of money to get blocked for months at a time. For instance, personal/living expenses make up a large portion of the cost of studying abroad. Thus, even if (exempt) tuition fees account for, say, USD 25,000 out of a total annual amount of USD 50,000, the balance USD 25,000 will be taxable.</p><p>The Budget also belied hopes of a policy-driven boost to savings, with standard deductions under Section 80C left unchanged. Conversely, with the government incentivising those at the low-to-middle-income levels to shift to the new exemption-free regime, demand for life insurance policies may get negatively impacted. On a related note, the insurance laws may be amended to allow for composite (life plus non-life) licenses. This raises concerns about new players entering the market without the necessary expertise in the complex business of life insurance.</p><p>Finally, the government has proposed that foreign investors in start-ups be subject to the ‘Angel Tax’, which previously only applied to Indian residents. Any premium paid by an investor in excess of the fair market value (FMV) of an unlisted company's shares is taxable in the hands of the company at a rate of 20% or higher. This may discourage inflows of risk capital into India.</p>
<p>Budget 2023-24 marked the NDA’s tenth budget and also the last ‘full’ one of the current government. (By convention, election-year budgets are meant to be interim ones.) At a recent joint session of the India CEO and CFO Forums in Chennai, Ketan Dalal, Managing Director of Katalyst Advisors, decoded the Union Finance Budget in the context of India’s economic trajectory and took stock of its main ‘hits’ and ‘misses’.</p><h2>Some Hits…</h2><p>At a 20,000-foot level, the FM did well by committing to reduce the fiscal deficit by 50 basis points, from 6.4% to 5.9% of GDP. She also announced a more modest – and probably achievable – disinvestment target of Rs 510 billion. Another positive was that the capex budget was hiked by 33%, to Rs 10 trillion (3.3% of GDP). Effectively, this means that capital spending in FY24 will be more than twice the FY19 levels (Rs 4.5 trillion). At the same time, the Railways are to receive their highest-ever allocation – Rs 2.4 trillion, or ~9x the level in FY14. This includes substantial capital allocations, enabling faster and better train service. Meanwhile, the allocation to the PM <em>Awas Yojna</em>, which aims to address India’s urban housing shortage while creating thousands of jobs, was increased by 66%, to over Rs 790 billion. The success of all of these initiatives will, however, hinge on implementation, including the ease of bidding for contracts.</p><p>From an ease-of-business perspective, the government is working to reduce the compliance burden through initiatives such as the use of PAN as a common identifier and Aadhaar as the foundation for centralised address updating. India’s ~6.3 million MSMEs, which account for nearly half of the country’s exports, will receive a boost in the form of an additional Rs 2 trillion in collateral-free credit guarantees. This is roughly equivalent to a 1% reduction in borrowing costs. Lastly, an allocation of Rs 350 billion to ‘green growth’ schemes, will go a distance towards facilitating the energy transition and meeting India’s net-zero commitment.</p><h2>…And Misses</h2><p>Against these positives, there were several misses in the FY24 Budget. First, even after the latest rejig, the highest tax rate kicks in at Rs 1.5 million, which is too low. At the other end of the scale, the highest surcharge rate, for earnings in excess of Rs 50 million, has been reduced from 37% to 25%, bringing down the effective tax rate from 43% to 39%. Again, this remains on the higher side. At the same time, Market Linked Debentures (MLDs) are set to lose their preferential tax treatment, with a rate equal to that for other debt investments, regardless of holding period.</p><p>Long-term capital gains deduction on the sale of property has been capped at Rs 100 million, which will impact the sale of high-end residential properties. Moreover, there is ambiguity about the applicability of this provision where there is a time-lag between the sale of a property and the purchase of a new one.</p><p>Income from REITs is typically distributed as interest, dividends, rental income or debt repayment. While income from the first three categories is taxable in the hands of the investor or unit holder, that from the fourth category is not. The latest proposal will, however, tax such income in the hands of the investor under the head, ‘income from other sources’.</p><p>Another issue of concern is the hike in TCS on foreign remittances, from 5% to 20%, with the earlier Rs 0.7 million annual threshold on remittances being removed. The money is refundable, and educational and medical expenses are exempt. Effectively, however, this will cause large sums of money to get blocked for months at a time. For instance, personal/living expenses make up a large portion of the cost of studying abroad. Thus, even if (exempt) tuition fees account for, say, USD 25,000 out of a total annual amount of USD 50,000, the balance USD 25,000 will be taxable.</p><p>The Budget also belied hopes of a policy-driven boost to savings, with standard deductions under Section 80C left unchanged. Conversely, with the government incentivising those at the low-to-middle-income levels to shift to the new exemption-free regime, demand for life insurance policies may get negatively impacted. On a related note, the insurance laws may be amended to allow for composite (life plus non-life) licenses. This raises concerns about new players entering the market without the necessary expertise in the complex business of life insurance.</p><p>Finally, the government has proposed that foreign investors in start-ups be subject to the ‘Angel Tax’, which previously only applied to Indian residents. Any premium paid by an investor in excess of the fair market value (FMV) of an unlisted company's shares is taxable in the hands of the company at a rate of 20% or higher. This may discourage inflows of risk capital into India.</p>
