Finance Minister, Nirmala Sitharaman presented her third Union Budget yesterday in the Parliament. The backdrop to this year’s Budget was the economic slowdown caused by the COVID-19 pandemic. As expected, recovery in economic growth was the main theme of this year’s Budget. Here are some key highlights:-
- Fiscal Deficit: The fiscal deficit for FY 2021 is expected to 9.5% of GDP. The FM has targeted 6.8% fiscal deficit for the next fiscal i.e. FY 2022. She expects the fiscal deficit to come back to 4.5% by FY 2026.
- Direct Taxes: No change has been made to direct taxes.
- Senior Citizens: Senior citizens above the age of 75 with no income other than pension and interest income will not be required to file Income Tax Returns.
- Provident Fund Tax:Interest earned on Provident Fund contributions above Rs 2.5 lakhs per year will be added to income and taxed as per the income tax rate of the investor. Interest on employee contributions above Rs 2.5 lakhs per year will be taxed; employer contributions will not be taxed. The effect of this tax will be primarily on investors who make high Voluntary Provident Fund (VPF) contributions.
- ULIP Taxation: FM has announced that there will be no tax exemption for maturity proceeds of unit-linked insurance policies (ULIPs) with an annual premium above ₹2.5 lakhs. The rules will apply for ULIPs issued on or after 1 February 2021. However, the amounts received under such ULIP policies on death of the policyholder will remain exempt from tax.
- Reduction in time for IT proceedings: Reopening of assessments period reduced from 6 years to 3 years except in cases of serious tax evasion.
- Disinvestment Target: The Government has targeted to raise Rs 1.75 lakh crores through disinvestment of Central Public Sector Enterprises in FY 2022. The FM announced plans to privatize two PSU banks and one general insurance company in FY 2022. The Government also plans to complete the disinvestment of BPCL, CONCOR and SCI in FY 2022. This can, if implemented successfully, will provide a boost to the equity markets.
- LIC IPO: The Government plans to launch the much awaited LIC IPO in FY 2022. The said IPO was planned earlier, but had to be delayed due to unfavourable market conditions. The LIC IPO will be one of the biggest events for the stock market in the coming fiscal year.
- Healthcare spending: The COVID-19 crisis brought into focus the importance of public healthcare infrastructure. The Government plans to ramp up budgetary allocation to healthcare by 137% in FY 2022.
- Infrastructure: The Government plans to build 8,500 km of highway, capex plan of Rs 1.07 lakh crores for Railways including east-west freight corridor, setting up textile parks, introducing competition in power distribution etc.
- Higher cess on some items: The Government announced agri and infra development cess on a number of items like fuel and liquor, but also suggested that there will be no additional burden on the consumer.
The Government has a difficult job in its hands trying to revive economic growth after severe crisis like COVID. The decision to not increase taxes, while increasing spending especially on infrastructure is a very welcome move.
In our view the Budget is positive for the capital markets. The Sensex rose by over 2,300 points by close of the trading session on Budget. Overall, the Finance Minister did a commendable job given the fiscal challenges.