In continuation of the government policy right from the onset of the pandemic, the Budget for 2023-24 further cements the priorities on ‘supply side’ economics, along with expansion of social welfare programmes and tax base. At the same time, as reiterated by the FM, there is a clear resolve to maintain fiscal discipline by restricting the fiscal deficit to 5.9% of GDP in 2023-24 (down from 6.4% for the current year) and sticking to the glide path of moving towards 4.5% by 2025-26.
With these objectives in perspective, there is a massive increase in capital outlay by 33% to `10 trillion, along with a welcome focus on rural and social infrastructure and welfare policies. There is also a focused attempt on addressing operational and working capital issues of the MSME sector. On the revenue side, the FM has continued the policy of ‘realistic’ estimation of net tax revenues, considerably enhancing the credibility of revenue projections in the Budget.
On personal income tax, expectedly there is a major overhaul of the optional concessional tax regime with a lowering of tax rates across income slabs and reduction of the ‘super rich’ surcharge. There is an attempt to make the new scheme more attractive by extending standard deduction hitherto available only in legacy provisions. However, exemption on maturity proceeds of life policies will now be restricted for policies with premiums only up to Rs 5 lakh. Whilst this may be a legitimate attempt to increase the tax base by ensuring high-income earners do not avail of this exemption, it will surely dampen the market for such policies and adversely impact life insurance companies. Conversely, it should encourage even greater flows into mutual funds where the returns have been traditionally better than higher-cost pure life insurance policies. This measure is perhaps also aimed at encouraging investors to distinguish between buying products for ‘protection’ of future income (life insurance) versus for building wealth (ULIPs, mutual funds).
One can perceive an attempt to prevent UHNIs from avoiding capital gains tax altogether by investing in very high-value residential properties regardless of the quantum of capital gains earned. Thus, a limit of `10 crore is prescribed for investment in residential real estate up to which capital gains tax exemption will be restricted. The provision for the increase in tax collection at source for remittances on foreign travel under LRS to 20% is also an attempt to track income at source.
On the flip side, an opportunity to streamline the plethora of rates and heads of payments for which withholding tax is mandatory has been missed. Instead, withholding tax provisions continue to become more pervasive and complicated for businesses with every succeeding Budget. There is no indication of a roadmap to streamline the unduly complex provisions of capital gains tax across asset classes, holding periods (to determine long-term capital gains), and varying tax rates. There also could have been greater attention given to seriously attract management of global pools of capital to India by making Section 9A more workable (which exemptions offshore funds from business taxation in India even though fund management is done from Indian shores). If such a change were to be carried out, conservative estimates suggest an annual increase of $1 billion in taxes for GOI. This aspect has been pointed out in previous economic surveys but remains ignored.
To conclude, a greater level of conviction and confidence in India’s ability to attract and manage global pools of capital is needed to significantly increase the flow of foreign capital, which will be needed for India to realise her vision and dream of a developed country by 2047. Perhaps, the announcement by FM of all regulators aligning their regulations to streamline working of financial sector participants will seek to address this tremendous opportunity for India.
The author is a Tax Partner, EY India