Income tax changes in Budget 2019 and how will it impact

Date : 14/02/2019
Read: 9 mins

A look at the taxation impact of Interim Budget 2019 on the industry in general, the relevant sectors with applicable budget proposals, and the taxpayer in general.

Income tax changes in Budget 2019 and how will it impact

An Interim Budget presents a set of accounts addressing both receipts as well as expenditures that the government places before Parliament till the full Budget is presented after the general elections. In view of the upcoming general elections in May 2019, an Interim Budget was presented by the interim Finance Minister Piyush Goyal.

The Budget unveiled a major scheme targeted to benefit farmers, a pension scheme for workers in the unorganised sector, tax sops, and allocations on a variety of welfare and developmental agenda. So it scores highly in efforts to build social infrastructure (such as farmers’ benefits and rural employment), better living standards (medical care and cleanliness) and technology (digital villages and artificial intelligence).

Individuals

The impact of any budget on the general public is most apparent as not much fine print is required to be pored over. This budget is no exception; let’s look at some major impacts:

Impetus on tax savings

Individual taxpayers having taxable annual income up to Rs 5 lakhs need not pay any income tax. If they make investments in provident funds, specified savings, insurance etc. gross income of up to Rs 6.5 lakhs would fall outside the tax bracket. This will lead to tax savings at the taxpayer level and also reduce their compliance efforts.
For salaried persons, standard deduction has been raised from Rs 40,000 to Rs 50,000. This will amount to an additional tax benefit of Rs 4700 crore nationwide and benefit more than 3 crore salaried personnel and pensioners.
TDS threshold on interest income earned from bank or post office deposits has been raised from Rs 10,000 to Rs 40,000. This will benefit people with moderate savings deposits and spare them from having to pay income tax. However, it will nevertheless be taxable for others when added up to their gross income.

Better Income Tax Administration and Ease for the Taxpayer

The push towards technology-driven tax assessments and return processing will greatly benefit individual taxpayers from the hassle of compliance-related efforts.
Income tax on notional rent on a second self-occupied house is now proposed to be made exempt. Presently this exemption is available for one self-occupied house only. The FM noted that having two houses is quite common in today’s nuclear family dominated society.
TDS threshold for deduction of tax on rent is proposed to be raised from Rs 1,80,000 to Rs 2,40,000. This should provide relief to small taxpayers.
Long-term capital gains exemption arising from proceeds of the sale of a residential house has now been expanded to purchase of two residential houses. However, this is a onetime exemption and the amount of capital gains cannot exceed Rs 2 crore. This will encourage people to invest more in real estate.

Conclusion and Criticism

Although the Budget offers many benefits to taxpayers, it will significantly reduce the revenue of the government. Besides, the FM has also relieved smaller businesses and GST payers from indirect tax liabilities. As already mentioned, welfare expenditure has also been enhanced in this budget.

Industry

It must be noted that India was the 11th largest economy in the world in 2013-14, and is now the 6th largest, and poised to become a $5 trillion economy in the next five years. India saw a massive inflow of Foreign Direct Investment (FDI) during the last five years to the tune of $239 billion. Against this backdrop, let us take a look at the proposals of the interim budget that affects the industry in general, along with their impact:

Government e-Marketplace (GeM) platform

While presenting the Budget, the Finance Minister stated that the Government e-Marketplace (GeM) platform created by the present government two years ago has now extended to all Central Public Sector Enterprises, and that transactions of over Rs 17,500 crore have taken place so far. This has not only resulted in an average savings of 25-28% but also brought in more transparency, efficiency, and speed into public procurement and transactions.

Goods and Service Tax changes

Exemption from GST for small businesses has been doubled from Rs 20 lakh to Rs 40 lakh. This will spare small businesses from GST compliance.
Small businesses having a turnover of up to Rs 1.5 crore will now be able to avail of the composition scheme, up from the previous limit of Rs 1 crore. These businesses have to now pay only a 1% flat rate and file only one annual return.
Small service providers (or a mix of goods and service providers) with turnover up to Rs 50 lakh can now opt for composition scheme and pay GST at 6% instead of 18%. This will benefit more than 35 lakh small traders, manufacturers, and service providers across the country.

Corporate Tax benefits extended

Domestic companies with a turnover of less than Rs 250 crore during FY 2016- 17 will continue to enjoy a reduced tax rate of 25% (increased by applicable surcharge and cess). The base year for this reduced tax rate is proposed to be extended to domestic companies with a turnover of less than Rs 250 crore for FY 2017-18. Previously, this step benefited almost 90% of Indian companies and the entire MSME sector; it is a step towards reducing corporate tax in a phased manner.

Stamp Duty Rationalisation

The proposed amendments in stamp duty provisions aim to rationalise various stamp duty provisions and streamline the stamp duty collection mechanism. Stock exchanges and depositories will be designated to collect stamp duty on sale or transfer of securities. This will streamline the collection of stamp duty and ensure its seamless sharing with states.
A single stamp duty rate for all financial securities transactions is proposed in this budget. This will help in reducing procedural requirements for brokers.

Conclusion and Criticism

To sum up, the thrust of this budget was on social infrastructure, ease of living, and technology-led governance aimed at inclusive and equitable growth. This means greater public expenditure; if this is not matched by decent earning it can lead to a budget deficit at the national level.

On the flip side, there are a few negative aspects that can transpire out of the budget proposals, such as:

The estimated Central Goods and Service Tax (CGST) collection for the next financial year is Rs 6.10 lakh crore, which would see a 20% growth over the revised collection estimates of the current financial year (Rs 5.04 lakh crore). Considering the growth so far is only 8%, a 20% increase may be a bridge too far. We can expect some strict measures to control revenue leakage and expand the tax base to bridge this gap.
The fiscal deficit target couldn’t be met because of the heavy welfare expenditures. It is generally regarded that fiscal deficit eventually leads to higher taxes, higher inflation, or both. The FM mentioned that the inflation rate is under control. However, with increased expenditure and transfer of direct benefits, there is a risk of inflation in the market.

Sectors

If we look at various sectors within the industry and see how the interim budget affects them, we can consider the following proposals for review:

Real estate wins

The benefits under Section 80-IBA of the I-T Act were extended by a year for projects approved until 31st March 2020. This section allows real estate developers to deduct 100% of profits derived from the development of affordable housing projects. Affordable housing can be a major driving force in the real estate sector for quite some time.
Amendments proposed in the interim budget in favour of the real estate sector (also see the ‘Individuals’ section below), particularly the affordable housing market, will also benefit allied sectors like steel and cement.
As per Finance Act, 2017, notional income on rentals from property held as stock-in-trade was taxable. This was subject to the condition that it was held beyond one year from the end of the financial year in which the certificate of completion of the property was obtained. This period of holding is now proposed to be extended to two years. This step will provide tax relief to real estate developers, particularly those who are suffering from a market slump. It will also encourage new investment in the sector.

Other Key Sectors who might benefit

Automobile: Because of the significant rural and agricultural focus, the automobile industry engaged in commercial and agricultural automobiles can expect a positive effect in rural areas.

FMCG: The Budget can be viewed as positive for the FMCG sector because of budget proposals that can drive demand and increase consumption. Higher personal disposable income can be expected because of proposals like,

Higher tax rebate for up to Rs. 5 lakh,
Rural disposable income to increase due to farmer's package and interest subventions,
Scrapping notional tax on a second home,
Capital gains tax exemption for two homes,
Extending notional tax waiver for unsold real estate inventories up to two years.

Civil infrastructure: Some of the benefits of the Rs 19,000 crore allocated to Gram Sadak Yojana can be expected to filter down to the civil infrastructure industry, such as construction and construction equipment.

Better Income Tax Administration

This budget steered towards technology-driven tax assessments and return processing, to be achieved in the next two years. This will spare companies and other taxpayers from personal interface and bring transparency and speed to the assessment process.

Conclusion and criticism

Mutual fund players were expecting a rollback of the long-term capital gains on equity funds introduced last year. Direct tax sops might indirectly benefit BFSIs as people with more disposable income would definitely invest portions of their tax-free income. However, without any clear-cut benefit directed at the BFSI sector, it is only a lukewarm Budget for this industry.

Taking all of the above into consideration, the question on people’s minds is whether the short-term benefits of welfare and tax sops come at the long-term price of inflation and increased fiscal deficit on a macro level.

To sum up, Interim Budget 2019 will have an impact on the macro-economy of the country. Let’s see how industries will get affected.