Update on India’s Union Budget for the Financial Year

The budget for FY 2020-21 is woven around three prominent themes that are – (a) aspirational India (b) economic development, and (c) a caring society.

During her speech, the Finance Minister stated that it is the Government’s intention to make India a five trillion dollar economy by 2024. Towards this end, the Government proposed a number of reforms with a strong focus on investment in infrastructure development, digital economy and employment generation in medium and small enterprises by stimulating growth, promoting digitisation, transparency and simplifying tax administration.

We have set out below the key announcements made during the budget speech.

Regulatory:                                    

• Proposal to remove criminal liability for acts which are civil in nature from various laws including the Companies Act, 2013;
• Proposal to issue a policy enabling the private sector to build Data Centre parks across the country;
• Proposal to introduce a new National Policy on Official Statistics to improve data collection and dissemination with the help of latest technology including artificial intelligence;
• Aadhaar-based verification of taxpayersis being introduced to weed out dummy or non-existent units. Further, a proposal to allot an instant online permanent account number (PAN) on the basis of Aadhaar;
• Unique registration number (URN) to be issued to all new and existing charity institutions;
• Registration of charity institutions to be made completely electronic. Donations made by a taxpayer to be pre-filled in the income tax return form to claim exemptions for donations easily; and
• Investment Clearance Cell proposed to be set up to provide “end to end” facilitation and support and to work through a portal.

Corporate commercial:

• Extending the benefit of carrying forward of business losses and unabsorbed depreciation to the amalgamation of nationalized public sector banks and general insurance companies;
• Proposal to reduce tax on cooperative societies to 22% plus surcharge and cess, from 30% at present;
• Dividend Distribution Tax (DDT) abolished. Dividend income from shares and mutual funds will now be taxable in the hands of the shareholder/recipient at applicable income tax rates;
• New section inserted for tax withholding at 1% on payments by e-commerce operators to resident sellers of goods or services on digital/ electronic platform;
• Dispute resolution scheme (Vivad se Vishwas) to be announcedwith a deadline of 30 June 2020, to reduce litigations in direct taxes. The scheme inter-alia proposes to include (i) waiver of interest and penalty and only disputed taxes to be paid for payments till 31 March 2020, (ii) additional amount to be paid if waiver of interest and penalty availed after 31 March 2020, (iii) benefits to taxpayers in whose cases appeals are pending at any level; and
• New companies engaged in the business of generation of electricity would be eligible for tax rate of 15%.

Tax concession for foreign investments made by foreign governments:

• 100% tax exemption to the interest, dividend and capital gains income on investment made in infrastructure and priority sectors before 31 March 2024 with a minimum lock-in period of three years by the Sovereign Wealth Fund of foreign governments.

Start-ups & Micro, Small and Medium Enterprises (MSME):

• Start-ups with an annual turnover of up to INR 100 crore will be allowed a 100% deduction of its profits for three consecutive assessment years out of 10 years;
• Window for MSME’s debt restructuring by RBI to be extended by one year till 31 March 2021;
• National Logistics Policy will be launched soon to inter-alia make MSMEs more competitive;
• Scheme announced to provide subordinated debt to entrepreneurs of MSMEs; the debt will be provided by banks as quasi-equity and would be fully guaranteed through credit guarantee trust for medium and small entrepreneurs;
• Tax burden on employees due to tax on employee stock option plan (ESOP) to be deferred by 5 years or till they leave the company or when they sell the ESOP, whichever is earlier;
• The turnover threshold for an audit of a MSMEs to be increased from INR 1 crore to INR 5 crore, for those businesses which carry out less than 5% of their business in cash;
• App-based invoice financing loans product to be launched, to obviate the problem of delayed payments and cash flow mismatches for MSMEs; and
• Amendments to be made to the Factor Regulation Act, 2011 to enable non-banking financial companies (NBFCs) to extend invoice financing to the MSMEs through Trade Receivables Discounting System (TReDS).

Banking and Finance:

• Encourage public sector banks to approach capital markets for fundraising;
• In order to protect interest of depositors, amendments to the Banking Regulation Act, 1949 to strengthen cooperative banks and avoid bank loan frauds;
• Proposal to formulate a partial credit guarantee scheme for NBFCs to address their liquidity constraints;
• Foreign portfolio investment (FPI) limit in corporate bonds to be increased from 9% of its outstanding stock to 15% of its outstanding stock;
• Proposal to formulate a new legislation for laying down a mechanism for netting of financial contracts;
• Capital requirements for NBFCs eligible for debt recovery under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 to be reduced from INR 500 crores to INR 100 crores; or loan size from INR 1 crore to INR 50 lakhs;
• New scheme NIRVIK (Niryat Rin Vikas Yojana) to be launched to achieve higher export credit disbursement, which provides for higher insurance coverage, reduction in premium for small exporters and simplified procedure for claim settlements; and
• Scope of credit default swaps to expand;
• Debt Based Exchange Traded Fund expanded by a new Debt-ETF consisting primarily of Government Securities to give attractive access to retail investors, pension funds and long-term investors.

Education and skill development:

• Proposal to announce a new National Education Policy; and
• Proposal to allow foreign currency loans/external commercial borrowing in the education sector;

Make in India initiative:

To push the “Make in India” initiative, the following amendments have been proposed:

• Increase in the rate of customs duty on mobile phones, electric vehicles, electronics, household articles etc.;
• Withdrawal of exemption from levy of social welfare surcharge cess on various goods and removal of concessional duty benefit on several items;
• 5%health cess to be imposed on the imports of medical devices, except those exempt from basic customs duty;
• Customs Act being amended to enable proper checks of imports under free trade agreements;
• Basic customs duty on imports of news print and light-weight coated paper reduced from 10% to 5%;
• Anti-dumping duty on purified terephthalic acid (PTA) abolished to benefit the textile sector;
• Lower customs duty on certain inputs and raw materials like fuse, chemicals, and plastics; and
• Higher customs duty on certain goods like auto-parts, chemicals, etc. which are also being made domestically.

Trade policy measures:

• “Rules of origin” requirements to be reviewed for certain sensitive items to ensure that free trade agreements are aligned with the national policy;
• Provisions relating to safeguarding duties to be strengthened to enable regulating such surge in imports in a systematic way;
• Provisions for checking dumping of goods and imports of subsidized goods being strengthened; and
• Suggestions for reviews of exemptions from customs duty to be crowd-sourced.

For any clarification or further information, please contact

Gaurav Wahie

Partner

E: gaurav.wahie@clasislaw.com 

Vasudha Luniya

Senior Associate

E:vasudha.luniya@clasislaw.com