Hon'ble Finance Minister presented India's Union Budget for financial year 2025-26 yesterday. With a coalition government and this being the 11th Budget for the present NDA government, it was expected that the Budget would provide direction including key priority areas and developmental plans for next 5 years and tax laws were likely to be continued to maintain stability.
The Budget delivered on both these counts, though it did more to achieve tax rationalization, promote simplification and improve tax administration. In my view, the Budget also focused on redistribution of wealth from the rich to middle and lower-income groups. This article provides a quick glance through the key budget proposals and its likely impact on the Indian economy.
Budget laid out 9 priorities which the government is likely to focus over the next 5 years. These include productivity and resilience in agriculture, employment and skilling, inclusive human resource development, manufacturing and services sector, urban development, energy security, infrastructure, innovation, research and development, and next generation reforms.
Growth of Infrastructure and manufacturing sectors have been a stated focus of the NDA government over its last terms as well. Admittedly Indian infrastructure and manufacturing sectors have seen significant growth, and the momentum is likely to continue. Though, budgetary allocation to infrastructure has remained the same and credit offtake schemes for medium and small enterprise to promote manufacturing have been mostly repackaged to sustain the momentum. The big take away for me was proposed investments in improving productivity in agriculture sector through sustained efforts in agriculture research, identifying new crops to improve yields and Agri incomes. Being primarily an agrarian economy, improved farm productivity through India specific solutions can provide a great boost to Agri incomes and entire rural economy. With significant rural population, any marginal increase in rural income can have significant positive impact on overall economy with demand for all goods and services going up. Further, there was focus on new employment generation with fiscal incentives through direct cash benefits being provided to enrol first time and new employees. Overall, from a policy perspective, a lot would need to be delivered through effective implementation though there was no specific focus on any one sector.
The finance minister also mentioned about review of Foreign Direct Investment and Overseas Direct Investment rules, which assumes significance due to an ever-expanding role India plays in the global economy. Furthermore, simplification of these rules could also help the government to bridge the fiscal deficit through foreign investments rather than sovereign borrowings.
Tax provisions were of greater significance with some key proposals. I felt higher tax revenues likely to be generated by taxing capital gains at higher rates and removing benefit of indexation have been used to grant tax concession to the salaried category of taxpayers. Consistent returns being delivered by stock markets have meant widening of economic disparity. One way to redistribute this wealth is by taxing the rich investors to give concessions to lower income earning group.
Also, lowering of long-term capital gain tax rate (to 12.5% from extant 20%) on sale of unlisted shares and abolition of angel tax (highly disputed tax issue largely effecting startup equity investments), could mean higher investment flows to startups. Combined with effect of equating tax on buy back of shares to dividends, promoters shall be keener to unlock the business value through share sale rather than dividends/buy back of shares. This would mean more capital remaining locked to grow the business and should promote investment.
With consistent economic growth, the middle-aged income group (between 20s-40 years of age bracket) have taken to high-risk F&O trading, which is more speculative in nature. This has left the banks with lesser deposits (corresponding to higher income levels) which can in turn fuel lending and at the same time, put hard earned money of people at risk. Further, increase in Securities Transaction Tax (STT), especially in Futures & Options segment, should deter the middle-income class from venturing into high-risk securities transaction.
Proposal to reduce the timelines for re-opening of tax audits to 3 years (5 years where the tax impact is more than INR 50 Lakhs) is a significant step in ease of doing business. With business being now required to maintain lesser back-ups and data, it will reduce the risk of inappropriate explanations, inadequate documentation, in case of a tax inquiry.
Buoyed by successful Vivad se Vishwas Scheme of 2020, government has reintroduced the same with the intent of reducing litigation and reducing burden on taxpayers and administration alike. Certain categories of taxpayers will be able to pay tax demands without interest and penalty, to buy peace of mind and save themselves from protracted litigation.
Overall, the tax proposals clearly suggest movement towards a simplified tax regime in coming years though with increased focus on tax administration. With lesser tinkering of rates and policies, Finance Minister has also hinted at stability and even over the last few budgets, efforts have been made to move towards a new income tax code with lesser incentives and exemptions. I would keenly watch out for modifications to foreign investment and overseas investment policies, which combined with stable tax environment, can open doors for fresh foreign investments.
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