The Union budget 2024-25 was presented in Parliament by a coalition government. While it broadly signals ‘change with continuity’, it has some interesting dimensions beyond the numbers and the fiscal math. For one thing, there are references to reviews of certain key policy frameworks and other initiatives such as on foreign direct investment (FDI) and outward direct investment (ODI). Also, the budget is noteworthy not only for what it has done, but what it has missed as well.
On the first aspect, the finance minister said in her speech that the government plans to evolve an economic policy framework within which next-gen reforms can be undertaken to facilitate job creation and high growth. This is a laudable initiative, but the litmus test will be the actual formulation and scope of the framework. The time it takes to create and its subsequent execution will also be crucial.
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There was also a reference in the budget speech to the need to simplify rules for FDI and ODI, and to promote the Indian rupee as a currency for overseas investment. While the FDI and ODI policy has been liberalised over the years, including through notification and regulations announced in August 2022, some aspects remain grey, such as whether portfolio investments are indeed permitted or not under ODI. Also, some substantive aspects (and indeed, procedural aspects) are difficult to deal with at the ground level, and one hopes that these will be addressed expeditiously.
One of the priorities of the government is building urban infrastructure, and within that, nudging state governments to reduce stamp duty. However, urban housing needs to be viewed in the context of stratospheric prices in most cities, including tier-2 ones, because of which owning a home remains a dream for a large part of the population. A more integrated approach is needed, one that raises the interest deduction limit from ₹2,00,000 to a much higher level, increases incentives for affordable housing, and more. In any case, stamp duty and registration could be cut substantially to reduce the burden to some extent.
Direct taxes
More broadly, the budget speech mentioned the government’s intention to conduct a comprehensive review of the Income Tax Act, 1961. One hopes that such a review will also address substantive elements, such as the need to do away with outlier legislation, which is a serious deterrent to ease of doing business. (In this context, doing away with the so-called ‘angel tax’, which applied not only to startups but all private companies, is commendable). It is comforting that the government plans to conduct the review within six months, and one hopes that the right talent is roped in to make this a meaningful exercise.
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The increase in long term capital gains rate on listed entities from 10% to 12.5% (it is actually an increase from around 12% to around 15%, including surcharge and cess) seems to have been triggered by the sharp rise in stock prices and the feeling that the government should have a bigger share of the profits. The increase in short term capital gains tax on listed shares from 15% to 20% is actually an increase from around 18% to around 24% with surcharge and cess factored in.
REITs and InvITs will also be affected by the higher long term capital gains tax, but the reduction in the short term capital gains tax from 20% to 15% will benefit them. Also, listed bonds and debentures will now have a lower LTCG tax rate of 12.5%, which could boost the debt market.
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On what the budget missed, one hoped that the non-taxable limit for individuals would be increased and the 30% rate would be imposed on an income of, say, ₹25 lakh rather than ₹15 lakh. The benefit in terms of boosting consumption and giving relief to the middle class would have outweighed revenue considerations. Unfortunately, that has not happened. The concessional 17% tax rate of manufacturing companies was not extended beyond 31 March 2024 either.
Execution is key
In conclusion, the planned economic policy framework, Income Tax Act review and intention to reduce stamp duty are noteworthy, but one hopes the formulation and execution helps meet the intended objectives. One also hopes that some of the misses in this budget, such as on TDS and extending the concessional tax on manufacturing companies are addressed before the bill becomes an act.
Ketan Dalal is managing director at Katalyst Advisors.