Budget 2021 was projected as “Budget Like Never Before” creating a lot of expectations in tax benefits for tax payers. While there is not much changes in the tax codes, it is a great budget as it paves a way for establishing a trusting relationship between investors and tax payers. The budget is balanced with a long term vision and addresses the inconsistencies and provides a level playing field for various class of investors.
I have summarized the budget and analyzed each points for its effect on investments, taxation and compliance requirements as follows:
1. Focus towards Capital Expenditure, Infrastructure Projects & Finance and then Monetization of operating infrastructure assets:
(a) Budget proposes to increase the capital expenditure by 34.5% to 5.54 lakh crores in FY 2021-22. Out of which, 44,000 Cr will be given to the Department of Economic Affairs for projects that show good progress on Capex. In addition, 2 lakh crores will be provided to various states and autonomous bodies for their capital expenditure.
(b) The National Infrastructure Pipeline (NIP) is to aggregate and capture all projects of 100 Cr or more in the Harmonized Master List of Infrastructure for better management and tracking of each project, currently expanded to has 7400+ projects.
(c) A professionally managed Development Financial Institution (DFI) is to be set up with a capital of 20,000 crores with an ambition to have a lending portfolio of at least 5 lakh crores in 3 years. Also, Debt Financing of InVITs and REITs by Foreign Portfolio Investors will be enabled.
(d) “National Monetization Pipeline” is to be launched and an Asset Monetization dashboard will be created for tracking the progress and to provide visibility to investors of the potential brownfield infrastructure assets.
Government intends to invest heavily in Capital Expenditures, create infrastructure assets and once created, monetize the operations of those infrastructure assets. Any country that focuses on capital expenditures and invests in building infrastructure assets is thinking and planning for long term development and growth. Also, once created, the Government believes that these assets can be monetized for financing new projects and at the same time can be better operated by the private players. This is a very important and encouraging announcement for long term investors.
2. Simplifying Investments and governing architecture:
The budget proposes to
(a) Introduce an investor charter as a right for all investors in all financial products with objective of better investor protection,
(b) Streamline provisions for 5L deposit guarantee to get easy and time-bound access to deposits to the extent of the deposit insurance cover,
(c) Consolidate SEBI Act, Depositories Act, Securities Contracts Act and Government Securities Act into a rationalized single Securities Markets Code.
All these steps will increase investor awareness and confidence in the financial products and securities. It also increases credibility of the government and shows that the government is committed in improving financial market ecosystem. Also, these steps will help in reducing compliance costs as well as the conflicts between various rules of different institutions.
3. Increase in Borrowing to finance increased Fiscal Deficit:
The current year budget deficit is expected to reach 9.5% (from target of 3.5%) because of challenges due to Covid 19 and Government’s determination to increase capital spending to boost economy. The goal is to bring down fiscal deficit target to 4.5% by 2025-26. The Government will be borrowing 80,000 crores in next 2 months and will be borrowing 12 lakh crores in 2021-22.
This is very important for debt investors. With such high borrowing plan, the interest rate is likely to go up. We are at the bottom of the interest rate cycle and the interest rate will not go down any further. As interest rate goes up, the return on debt funds will come down. It is recommended to invest only in the ultra short or short duration bond funds. The funds with higher maturity will give lower single digit returns and also negative returns.
Budget proposes to cap the premium on the ULIP (Unit Linked Insurance Plan) schemes for claiming exempting to 250,000 per year. Payment of premium of more than Rs. 250,000 per year for one or more policies is proposed to be taxed similar to the taxation of equity investment i.e. 10% on the gain.
This is a welcome step for the asset management company as now it is a level playing field for other investments, especially, direct equity (e.g. PMS) or equity mutual funds. Also, it will negatively affect the insurance and banking industry as banks are heavily promoting insurance products. You can expect marketing of ULIP policies with premium upto Rs. 250,000 or of the traditional plans, which may or may not be the right plan for the investors.
5. Capping exemption on EPF interest:
The budget proposes to cap the exemption of accrued interest on contribution to the Employee Provident Fund (EPF). Only interest accrued upto the contribution amount of Rs. 250,000 per year will be exempted. Any interest on contribution above will Rs. 250,000 will be subject to income tax.
This is an indirect way of taxing persons earning high salaries and contributing huge amount to these funds. As the interest income is taxed at a marginal tax rate, it is likely that the persons with high salary income will not invest in EPF but will invest in equity or debt securities or mutual funds for higher after-tax return.
6. Rationalization in Taxation of income in foreign Retirement accounts
For NRI/OCI returning to India and becoming Ordinary Resident, taxability of retirement accounts in foreign countries is a contentious issue as it is taxed on accrual basis in India whereas, it may be taxed on receipt basis in foreign countries. The budget proposes to address this mismatch and government will come out with the manner in which such income will be taxed in India.
This is a very welcome step for anyone who has moved or planning to move back to India. There is no clarity about taxation of income or withdrawal from foreign retirement accounts and the manner in which it is to be calculated. However, as Indian government did not give tax break while contributing to retirement account, whether full withdrawal is taxed or only the income portion, in which manner and subject to which conditions, is to be seen. But this is a very welcome step in the right direction that will definitely bring clarity and remove genuine hardship of ex-pats and returnees.
7. One Person Company and NRI:
The Budget proposes to remove turnover and paid up capital restrictions on incorporating and setting up of One Person Company (OPC). The residency restriction for Indian Citizens is proposed to be reduced from 182 days to 120 days and NRIs will also be allowed to incorporate the OPC in India. And, OPC’s conversion into any other type of company at any time will also be allowed.
This is very positive for NRIs who wants to start a venture in India with full control and responsibilities. Now they can start an OPC and later convert it into another type of company and sell stake or raise funds. There is no need to be an Indian resident or find another person for incorporating a company in India.
8. Tolerance for Sale consideration and Stamp duty (jantri) value difference increased from 10% to 20%
If an immovable property is sold for a price which is below the stamp duty value, more than 10% of the difference between stamp duty value and agreement value was taxed both for the seller and the buyer. Now, the budget proposes to increase the difference from 10% to 20% provided (i) the transfer takes place from Nov 12, 2020 to June 30, 2021 (ii) it is a first time allotment to any person and (iii) consideration is less than 2 crore.
Because of Covid, the real estate sector is experiencing genuine difficulties in selling residential units and their unsold inventories are piling up, also creating issues in debt servicing. This proposal may incentivize real-estate developers to liquidate their unsold inventory at a lower rate to the home buyers. It means either the price of residential real estate could come down or the cash portion of the deal would increase or both.
9. Customs Duty on Gold and Silver reduced:
Currently, the gold and silver attracts 12.5% import duty, which was increased from 10% in July 2019. The budget proposes to bring it to the previous level of 10% duty.
As India does not produce gold and all gold is imported, the gold price is expected to come down by 2.5% as a result of reduction in customs duty. As an investment, gold provides an inflation hedge. And, the SGB (Sovereign Gold Bonds) issued by the Government are the best investment for anyone wanting to invest in gold as it give 2-2.5% return in addition to the return on gold and are tax efficient. NRIs are not allowed to invest in SGB and it is recommended to buy gold out of India because it would be cheaper by 10% and higher reliability of purity.
10. No Income Tax return filing for Senior Citizens over 75 years:
An Indian resident senior citizen over 75 years is not required to file income tax return if he has only pension income and interest income from the same specified bank in which pension is received. However, he/she needs to submit a declaration to the bank. The bank will compute the income of such senior citizen after adjusting for deduction and exemptions and deduct income tax (TDS) at applicable rates.
While the intention is good, it may not be practical. The provision requires that the senior citizen has only one account in a bank specified by the government and no other assets or income other than pension or interest. With only 5L of deposit insurance, senior citizens tend to maintain accounts with more than one bank. Also, if they have investments other than bank deposits and other sources of income (e.g. rent), they may not qualify.
11. Dividend Income and Advance Tax Calculation:
As dividend income is taxable, the tax payers are required to pay advance tax considering total income including dividend. However, accurate amount of income from dividend cannot be estimated resulting in shortfall or over payment of advance tax. The budget proposes to calculate and pay advance tax installments based on when dividend is declared / received.
This is a welcome step but it means that the taxpayers will have to calculate and report dividend income monthly or periodically. As pre-filled tax returns will include dividends now, while reconciliation is to be made, it should simplify compliance.
12. Income Tax Audit Limit increased and GST audit removed:
The turnover limit for businesses to get their books of accounts audited is increased from 5 crores to 10 crores, provided the cash transactions are less than 5% of receipts or payments. Also, the GST Audit requirement is proposed to be removed and the annual GST return can be filed on self-certification basis.
The government wants to trust the tax payers provided they are also honestly reporting their income and filing tax returns. The government is sending a message that if the businesses increase digital transactions and reduce cash transactions, their compliance burden will be reduced substantially. While they have to maintain the books of accounts, there is no requirement to get the books audited by a Chartered Accountant i.e. no detailed scrutiny of accounts and reporting of transactions to the income tax or GST department. It is a very welcome step in building confidence and increasing the ease of doing business.
13. Simplifying Income Tax Preparation and Resolving Disputes
(a) The pre-filled tax returns will include interest from bank and post office accounts, dividend income as well as capital gain from listed securities (sale and purchase of securities) details
(b) The budget proposes to introduce faceless Income Tax Appellate Tribunal (ITAT). The scrutiny and appeal process is already faceless.
(c) Income Tax Settlement Commission will be discontinued and the Board of Settlement will take on the pending cases, mainly for big tax payers.
(d) Small and medium taxpayers having taxable income up to 50 lakhs and disputed income of up to 10 lakhs will have an option to opt for resolving disputes through Dispute Resolution Committee (DRC)
The Government is consciously making steps to reduce compliance burden of the tax payers, speed up the process of collecting data for tax return filing, simplifying income tax return preparation, reduce differences between income declared and assessed as well as resolving disputes. With DRC, even small and medium taxpayers would have access to resolving disputes. All these steps shows seriousness of the government to provide tax certainly, reduce disputes if there is any, to resolve it quickly giving positive experience to the taxpayers.
14. Reduced Due Date of Filing, processing of Income Tax Returns and assessment
(a) Income tax return is to be filed within 9 months (reduced from 12 months) from the end of financial year, i.e. by December 31. Earlier the deadline was end of assessment year i.e. March 31.
(b) Any revised return is also to be filed within 3 months prior to the end of Assessment year i.e. by December 31.
(c) Similarly, Income Tax department would also have to send intimation of the assessment within 9 months after end of financial year i.e. by December 31.
(d) The scrutiny notice is to be sent within 3 months (reduced from 6 months) from the end of the year in which return was filed i.e. by June 30 (from September 30).
(e) Time limit for reopening assessment is reduced from 6 to 3 years unless there is an evidence of escaped assessment of 50L or more and that too with an approval of the Principal Commissioner
The Government and the Income Tax department are working very hard to speed up the processing of the income tax returns. So, refunds are processed faster, queries if any, are communicated and followed up immediately, assessment can be completed quickly, giving peace of mind to the tax payers. Also, with reduced limitation period on reopening of assessment, the tax payers can breathe relief that the Income tax department will not come after them after 3 years.
(a) No TDS is to be deducted on Dividend payment to REITs or InvITs.
(b) TDS on Dividend to Foreign Portfolio Investor (FPI) is to be made at a lower treaty rate
(c) Anyone having turnover over 10 crores and buying goods of Rs. 50 lakhs from a person needs to deduct TDS @ 0.1% on purchase of goods over 50L. If the person does not have a PAN, TDS is to be deducted @ 5%.
(d) If a person has not filed the income tax return for two prior years and if the aggregate of TDS/TCS is 50,000 or more in each of 2 previous years, TDS is to be deducted at a higher of (a) 2x the specified rate or (b) 5% or (c) 20% if no PAN.
These provisions are aimed at reducing compliance, rationalizing tax burden on investors as well as increasing the tax base, finding defaulters and increasing revenue collection.
16. Extension of benefits:
(a) Extension of 1 year for deduction for Interest on loan for Affordable housing
(b) Eligibility requirement of start-ups for Tax holiday is extended by 1 year
(c) Capital gain exemption by investing in started extended by 1 year
These provisions are required to support the real estate industry as well as affordable housing market, driving innovation by incentivizing and promoting start-ups.
In summary, while there is no change in tax slabs and not much change in income tax provisions, the budget was very important for a long term perspective as well as to build confidence and establish credibility in the mind of investors as well as tax payers. Thanks.