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In an election year, the central budget gets bifurcated into two parts - a vote-on-account and the full budget. While the goodies are generally packed into the first basket having an eye on the forthcoming ballot game, the latter gets the not-so-sweet or bitter pills.  The Central Budget of fiscal 2019-20 presented and tabled by the newly appointed Finance Minister (FM) Nirmala Sitharaman on July 5, 2019, was no exception.

Personal tax

There is essentially no change in tax slabs or rates for individual taxpayers in the basic exemption limit and in the standard deduction cap. The basic exemption threshold was increased to `5 lakh of taxable income and the standard deduction cap was hiked from `10000 to `50000. These were parts of the interim budget proposal. The only change the FM made is to burden the higher income categories by putting additional surcharge of 3% in the `2-5 crore category and 6% in the above `5 crore income category. This translates into effective tax rates of 39% and 42.74% (30% basic tax + 7.5 or 11.5 % surcharge + 4 % cess). However, this hike is likely to have only a moderate effect as during the 2017 fiscal, only about 80000 people declared income of `1 crore and above. An estimate shows that the tax receipt from the hike will be well below `8000 crore in this fiscal.   

An additional interest deduction of `1.5 lakh per annum has been allowed on loan taken for purchase of residential property valued up to `45 lakh. This is expected to generate demand from first-time home buyers. This adds up to the current deduction limit of `2 lakh interest for loans on affordable houses. However, the time limit for availing such loans has been capped at March 31, 2020 which is a major catch.

The FM has incentivised the purchase of electric vehicles by proposing an additional `1.5 lakh on interest on loan taken to purchase such vehicles. On the other hand, she has also increased the ‘Special Additional Excise Duty’ and ‘Infrastructure Cess’ by `1 each on both petrol and diesel. This actually translates into hike of `2.50 and `2.30 respectively for petrol and diesel if one considers the state level VATs. The domestic car manufacturers are already under great stress due to the YoY negative movement in the industry and the consequent stockpile. Hence, hitting the fuel price, which is already a silent killer these days, will worsen the situation. In this backdrop, incentivising the prospective buyer of electric vehicles, which itself is a non starter till date because of a number of technical and infrastructural issues, does not augur well. 

Corporate tax

The Budget has proposed that the tax rate of 25% will be extended to companies with turnover of `400 crore. Reduction of tax rates below 30% is always on the wish list of the industry. Hence, by raising the turnover cap, the FM has brought in almost 99.3% of the Indian corporate world within the 25% tax ambit. However, the large companies, who are the major contributors to the economy, continue to pay at the marginal rate of 30%.

Additionally, the Budget has also proposed to exempt companies from tax, which buy firms under insolvency proceedings. The differential of the fair market value and actual sale value will be considered for the said purpose.  In order to boost economic growth, an investment-linked deduction for mega-manufacturing plants under section 35 AD of the Income Tax Act and other indirect tax benefits in sunrise and advanced technology areas will be launched by the government soon. These advanced technology areas revolve around 

semi-conductor fabrication, manufacture of solar photo voltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers, laptops, etc.

The FM has allowed the aggregate amount of unabsorbed depreciation and brought-forward loss as deduction for computing MAT liability of distressed companies. This will certainly facilitate the companies referred to NCLT under provisions of IBC code. She has also made an attempt to incentivise the start-ups to carry forward and set-off losses on satisfaction of any of the two conditions i.e. continuity of either 51% of voting power or 100% original shareholders.

However, the twin measures that are expected to hit hard the pack of listed companies include increase in the minimum public shareholding by resetting the threshold from the current 25% to 35%. Back of the envelop calculation shows that in about 1300 actively traded companies, the promoter’s holding is currently more than 75%. Hence, complying with the new norm will step up the supply of papers in the market resulting in price depletion. Secondly, listed companies shall also be liable to pay additional tax at 20% in case of buy back of share, as is the case currently for unlisted companies.

The author is the Chief Manager (Legal & Risk Management) Peerless Financial Services Limited