Analysis of Union Budget 2020-21

The Author is Yash Singh who is pursuing B.A.LL.B.(Hons.) from Faculty of Law, University of Allahabad.

Finance Minister (FM) Nirmala Sitharaman has presented the Union Budget 2020 of India on the 1st of February, 2020. The government has taken some measures towards reaching the target of a $5 trillion economy by the end of 2022.

The Union budget in 2020 was presented in a backdrop of a slowing down of the Indian economy with estimated GDP growth for 2019-20 being at an 11-year low of 5%[1]. Factors such as the IL&FS (shadow banker, NBFC) crisis contributed to the slowdown;[2]as well as international financial markets issues such as the China - US trade war. In January 2020 Western Asset Background Management Company has reduced its government bond holdings following the atmosphere in the country due to the Citizenship (Amendment) Act, 2019 and the situation in Kashmir which are affecting the economic spirit. Investments in India will be shifted to other countries such as China and Malaysia.

 According to the Economic Times, the BSE Sensex and Nifty have given positive returns only thrice in the last decade during the pre-Budget week, while offering positive returns five times in the post-budget week. In 2016, the markets gained 7.2% in the post-Budget week.
Abhijit Banerjee said "we should forget about Budget deficits and meeting targets. We should even forget about inflation targeting. Let the economy rip a bit."

Weak demand driving slowdown:-

The Union Budget 2020-21 has been presented amid an economic slowdown, coupled with rising food inflation. Economic activity has been losing momentum for the past five quarters, with questions on whether the current economic headwinds have bottomed out or will stay longer.
Three of the four growth engines—private consumption, private investment, and exports—have slowed down significantly. Government expenditure growth has been doing the heavy lifting over the past few quarters as private demand has taken a breather. Several cyclical and structural factors, such as low rural wages and tightening lending conditions, have weakened growth. This slowdown has affected several core sectors, including auto, real estate, and manufacturing.

India continues to face global headwinds due to policy uncertainties, falling growth and trade volumes, and technological changes across the world. Geopolitical tensions leading to oil price fluctuations may add to economic woes. Leading economic indicators suggest the economic slowdown may be tapering with green shoots visible in a few quarters of the economy. The Economic Survey 2020 expects growth to rebound in H2 of FY2021 and annual growth to be in the range of 6-6.5 percent.

Fiscal space, inflation, and currency valuation causing concerns:-

The fiscal deficit crossed 114.8 percent of the annual budget target in the first eight months, indicating stress on government finances. The fiscal deficit for FY 2020 was revised to 3.8 percent of the GDP, up from the earlier budget target of 3.3 percent. The government used the escape clause provided under the FRBM Act to allow the relaxation of target. The FY 2021 fiscal deficit target is pegged at 3.5 percent of GDP.
Consumer price inflation averaged 4.1 percent in 2019-20 (April to December) and stood at 7.3 percent in December, primarily because of rising food prices, although core prices remained below 4 percent. Domestic prices are further influenced by rising global food prices. The Thalinomics analysis in the Economic Survey suggests that food prices have come down since early 2000, boosting consumer affordability.
The exchange rate touched 76 rupees per dollar  in early april. While factors such as slowing economic growth and a rising fiscal deficit weigh on sentiments, the recent geopolitical tensions and their possible impact on oil prices and the economy may have added to its vulnerability.
The industrial production index in November suggests a rebound in the industry sector with manufacturing registering solid growth. On the use-based front, the consumer durables and capital goods indices, which are often tracked to gauge medium-term growth and the strength of consumer demand, improved on a month-on-month basis.
FDI inflows remained strong with a net inflow of US$24.4 billion investments during April-November 2019. FPI flows were vulnerable, but their share in total investment declined by 6 percent since 2015. This bodes well for the economy because direct investments are more stable and help create real assets on a long-term basis. The trend may continue as India embarks on an ambitious infrastructure project to spur economic growth.

Key features of Budget:-

1.      Direct taxation:-
·         The government has proposed a new income tax regime that comprises a significant change in the tax slabs rates. Taxpayers have been provided with an option whether they want to pay taxes according to the new regime or if they want to continue paying taxes according to the existing regime. However, a few taxpayers may not be able to switch back to the existing tax slab once they opt to follow the new one.
·         Under section 194J- fees for technical services, TDS has been reduced to 2% from 10%.
·         Under Section 80EEA, the additional deduction of Rs.1.5 lakh for interest paid on home loans will now be allowed for the loans sanctioned till the 31st of March 2021.
·         In the case of startups, employees possessing Employee Stock Option Plans (ESOPs) may defer paying taxes up to five years from the time of exercise, till the time they leave the startup, or until they sell their shares, whichever is earlier.
·         Eligible startups with a turnover of up to Rs 25 crore is permitted to deduct 100% of its profits for three continuous assessment years of seven years if the overall turnover is under Rs 25 crore. This limit is now increased to Rs 100 crore. Furthermore, the eligibility period to deduct is increased to 10 years from 7 years.
·         Section 194: Dividend paid by Indian companies, to a shareholder, who is resident in India, TDS @ 10% if the dividend amount exceeds 5000 during the FY.
·         Section 194K: Dividend paid by MF to a resident TDS 10% will be deducted only if the dividend amount exceeds 5000 during the FY.
·         Section 194: Dividend on shares paid by company exceeding Rs 5000 will be subject to TDS @ 10%.
·         Section 206AA: in relation to 194O has been amended to 5% instead of 20% in case of not furnishing the PAN.
·         Section 234G (insertion of new section) relating to payment of fee of Rs 200 per day for default in furnishing statement or certificate under section 35 by research association, university, college, company or any other institution.
·         Section 50C, in case of transfer of capital asset being land or building or both, if value adopted for the purpose of stamp duty does not exceed 110% of the actual consideration received, then consideration so received shall be deemed to be the full value of consideration for computing capital gains on transfer of such capital assets. Before the amendment it was 105% instead of 110%.

2.      Indirect taxation:-
·         The person involved/benefited out of fake ITC shall also be liable for a penalty of 100% of the tax involved.
·         Composition scheme restricted to taxpayers making the inter-state supply of service, supplies not leviable to GST and supplies through e-commerce operator where TCS is deductible.
·         The date of the debit note will be standalone considered for availing input tax credit, delinked from the date of invoice.
·         The retrospective effect has been given for transition provisions from 01st July 2017, to nullify the decision of Gujarat High Court in case of Siddhartha Enterprises.
·         Powers provided to notify the form of TDS certificate and late fee (200 per day, maximum of 5,000) for non-issuance of TDS certificate has been waived off.
·         A provision inserted for cancellation of voluntary GST registration for distinct persons.
·         Power to condone the delay in applying for revocation of cancellation has been provided to the additional commissioner and commissioner for a period of 30 days.
·         Refund due to Inverted tax prevalent for tobacco products is barred with a retrospective effect from 1st July 2017.
·         Applicability of 6% CGST rate (total of 12% IGST rate) for the supply of pulley, wheels and products used in Agri machinery between 1st July 2017 to 31st December 2018.
·         The entry in Schedule II to the CGST Act on ‘Transfer of business assets’ will now exclude transactions done without consideration from it.

3.      MSMEs:-
·         Steps proposed by the government for the MSMEs:
·         Amendments will be made to Factor Regulation Act, 2011.
·         Amendments to be made to enable NBFCs to extend invoice financing to MSMEs.
·         Provision of subordinated debt for MSMEs by Banks which is guaranteed by Credit Guarantee Trust. The debt will count as quasi-equity.
·         App-based financing loans will be introduced for MSMEsApp-based invoice financing loans product to be launched, to obviate the problem of delayed payments and cash flow mismatches for MSMEs.

4.      Agriculture:-
·         The government aims to double farmers’ income by 2022
·         Help 15 lakh farmers solarise their grid-connected pump sets
·         “KisanRail” and “KrishiUdaan” for seamless transport of perishable farm goods
·         Increasing coverage of artificial insemination to 70%
·         Raise fishery exports to Rs 1 lakh crore by 2024-25

5.      Education:-
·         About 150 higher educational institutions will start apprenticeship embedded courses.
·         Special bridge courses to improve skill sets of those seeking employment Abroad.
·         Ind-SAT to be conducted in Africa and Asia under study in India programme.
·         Allocation of Rs 99,300 crore for the educational sector in 2020-21.
·         Allocation of Rs 3,000 crore for skill development.

6.       Financial sector
·         Deposit Insurance Coverage to increase from Rs 1 lakh to Rs 5 lakh per depositor.
·         Eligibility limit for NBFCs for debt recovery under SARFAESI Act proposed to be reduced to asset size of Rs 100 crore or loan size of Rs 50 lakh.
·         Separation of NPS Trust for government employees from PFRDAI.
·         Proposal to sell balance holding of government in IDBI Bank.

7.      Water, Wellness, and Sanitation Goals:-
·         More than 20, 000 empaneled hospitals under PM Jan Arogya Yojana.
·         “TB Harega Desh Jeetega” campaign launched to end TB by 2025.
·         Expansion of Jan Aushadhi kendra Scheme to all districts by 2024.
·         Focus on liquid and greywater management along with waste management.


This budget is not a spend-and- stimulate exercise despite the fact that it has overrun the3.3% target on the fiscal deficit by as much as 0.5 % point. Nor is it a feel good budget even accounting the new tax regime for personal income tax with lower tax slabs. In sum there is  nothing spectacular about this budget which rides on optimistic growth estimates. Whether if flies or falls flat depends on how growth pans out in the economy in the next four quarters.

[1] The Economic Times.