Budget 2020: Tax tweaks but little else as govt wishes for a revival

By Aman Malik

  • 01 Feb 2020
Budget 2020: Tax tweaks but little else as govt wishes for a revival
Finance minister Nirmala Sitharaman | Credit: Reuters

On Saturday, while delivering her second union budget speech, Nirmala Sitharaman spoke for almost two hours and 40 minutes, the longest any Indian finance minister has done. 

And yet, at the end of her marathon speech, it was not evident if the finance minister had any clear roadmap to offer to extricate India out of the economic morass it finds itself in, or whether her proposals were intended simply as a set of individual proposals, which she hopes will eventually add up to more than the sum of their parts. 


On the one hand, Sitharaman went big on agriculture and rural infrastructure. She set aside Rs 2.83 trillion towards agriculture and allied sectors, and unveiled a mammoth Rs 3.6 trillion scheme to address issues of water shortages.

On the other hand, she has had to cut back significantly on politically expedient items like food subsidies in 2019-20, to keep the burgeoning fiscal deficit from slipping any more than the 50 basis points hit she has had to swallow. 

As was widely expected, Sitharaman eased the fiscal deficit target from 3.3% to 3.8% for the current financial year, and, rather optimistically, pegged the next year’s target at 3.5%. This, analysts say, is a tough target.


In fact, the government had no choice but to ease the deficit target, as a slowdown in economic growth to an estimated 5% for 2019-20 crimped tax revenue. Its inability to garner enough money from disinvestment made matters worse, and it had to depend on higher dividends from the Reserve Bank of India to bridge the gap.

DK Srivastava, chief policy adviser at EY India, said that in spite of the slippage in the fiscal deficit for this year and the next, the extent of stimulus provided by the budget has remained marginal and the propose increase in capital expenditure is just 0.1 percentage point of gross domestic product.

And yet, in 2020-21, Sitharaman and her boss, Prime Minister Narendra Modi, are banking on an extremely ambitious disinvestment target to bail them out and keep the fiscal deficit in check. In the last budget, the government had set itself a disinvestment target of Rs 1.05 trillion. The target has now been scaled down to Rs 65,000 crore; so far, however, the government has raised just Rs 18,100 crore.


But the government seems unfazed. For 2020-21, it has set itself an even stiffer target of Rs 2.1 trillion, for which it will sell a part of the Life Insurance Corp (LIC) of India and divest the remainder of its stake in IDBI Bank, which it had sold to the insurance behemoth in January 2019. 

Moreover, the 3.5% deficit target assumes that nominal GDP growth—or GDP at current pricess—will be 10% next year. This will be a challenge, considering this year’s print is estimated to be around 7.5%--the weakest pace in more than four decades.

The budget estimates for tax revenue collections again raise a doubt. In the next fiscal year, the government aims to earn gross tax revenue of around Rs 24.23 trillion. This is an increase of almost 12%. For the current year, the government had initially projected an increase of more than 17% but is now actually failing to collect what it did last year. In such a scenario, meeting next year’s target also seems difficult.


If disinvestment was one big theme this year, the other major policy was on taxation as the finance minister sought to rationalise income tax slabs for individual taxpayers and put more money in their hands in the hope of kick-starting consumption. Sitharaman introduced a dual taxation mechanism for individual taxpayers in which those opting out of tax exemptions will get taxed at a lower rate. 

There is little clarity yet on whether those opting for the new system will actually gain materially. But the government did indicate that it plans to completely or substantially end exemptions in the future. In fact, Sitharaman said that more than 70 out of the 100-odd exemptions in the direct tax code were indeed being done away with. 

Moreover, this move could even hurt insurance companies and mutual fund houses, which benefit from the money that taxpayers channel into buying insurance policies or to make mutual fund investments to save tax. Not surprisingly, shares of publicly listed insurance companies plunged, dragging down the Sensex and the Nifty by almost 2.5%.


What the government did do away with completely though was the Dividend Distribution Tax (DDT), which was levied on companies distributing dividend to their shareholders. Going forward, instead of the company, the tax liability will fall on the shareholder, who will now have to add dividend incomes to his or her total income and pay tax accordingly. This will also mean that corporate houses will now have to pay taxes at the level of the holding company, as dividend-yielding subsidiaries will no longer have to pay the DDT. 

The finance minister sought to lay the red carpet out for a section of foreign investors as it granted a tax exemption to sovereign wealth funds for investments in India’s infrastructure sector.

This, the government hopes, will go some way in funding the Rs 103 trillion needed as part of its infrastructure push via the National Infrastructure Policy it had unveiled on December 31. Besides, the government-backed National Infrastructure and Investment Fund, sovereign wealth funds from several countries including Singapore, Kuwait, Abu Dhabi and Norway have substantial investments in India’s infrastructure and energy sectors. 

Further, the government sought to open the capital account a little bit to foreign investors by hiking the investment limit for foreign portfolio investors in corporate bonds from 9% to 15%. Sitharaman also proposed debt exchange-traded funds made up of government securities.

But in a counter-intuitive move, the budget has also increased custom duties on several items like footwear and furniture, a move that is likely to hurt companies such as Swedish retailer IKEA. And while it gave some tax relief to startups, it also imposed a 1% tax to be deducted at source on e-commerce companies.

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