Earlier today, the Indian Finance Minister (FM) presented the 1st Budget of the newly formed government for financial year (FY) 2019-20. While there were many expectations before the Budget to revive animal spirits in the economy, the Budget has presented a mixed bag. The focus of the Budget was on the rural economy and Make in India, while limited proposals appear to have been made to increase disposable income and increase consumption.

At the outset, while the FM has not changed corporate tax rates, the Budget proposes to extend the reduced corporate tax rates of 25% for Indian companies whose turnover is less than INR 4 billion, which would cover almost 99.3% of domestic companies. However, for individuals falling in the rich and super-rich category, the Budget proposes a higher surcharge on income tax resulting in the highest effective tax rate of between 38-42%. Increasing taxes through surcharges is not an appropriate way of increasing taxes, especially when surcharges which are introduced never get removed. The rates for the rich are amongst the highest in the world for developing countries and we will see increased movement of the rich and super rich out of the country.

From a foreign investor perspective, relaxations have been proposed to the investment norms in aviation, media, insurance, insurance intermediaries and single brand retail sectors. For incentivizing Foreign Portfolio Investors (FPI), the Budget proposes: (i) a deemed increase in the statutory limit for FPI investment in a company from 24% to the sectoral foreign investment limit; (ii) to permit FPIs to subscribe to listed debt securities issued by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs); and (iii) to ease KYC norms for FPIs.

The Government appears to have recognized some of the issues pertaining to start-ups and they continue to benefit in this year's proposals. To resolve the 'angel tax' issue on capital subscription, the Budget proposes that start-ups will not be subjected to any kind of scrutiny in respect of valuations of share premiums, if requisite declarations and tax filings are made. Other changes include: (i) the removal of angel tax on investment by Category II Alternative Investment Funds (AIFs) in start-ups; and (ii) extended roll-over benefits in respect of capital gains from the sale of residential property, if invested in an eligible start-up. On the softer side, the FM has also indicated that a television channel will be broadcast exclusively for the promotion of start-ups.

Another area where the Budget has tried to address concerns is in relation to Non-Banking Financial Companies (NBFCs), which have been under a lot of stress in the recent past. In order to facilitate securitization transactions by financially sound NBFCs with public sector banks, the Budget proposes a six-month partial credit guarantee for the first loss up to 10%. The requirement to create a Debenture Redemption Reserve for public debt issuances by NBFCs has also been dispensed with. Additional tax rationalization for NBFCs has been undertaken to put them on par with banks and allow for interest on bad or doubtful debts to be recognized in the year of receipt.

Interestingly, the FM has addressed certain conflicts in case of insurance and housing finance sector. The nodal regulator for housing finance companies will now be the Reserve Bank of India (RBI) instead of the existing regulator i.e., the National Housing Bank (NHB). In case of the National Pension System, separation of the National Pension Trust from the regulator, Pension Fund and Regulatory Authority (PFRDA), has been proposed.

The FM has also proposed a slew of changes to provide further thrust to financial services enterprises operating in International Financial Services Centres (IFSCs), such as GIFT City. These include (i) the expansion of exemptions on transfers of specified instruments by a non-resident through stock exchanges set up in IFSCs; (ii) exemption from tax on interest payable to a non-resident by units in IFSCs; and (iii) exemption from tax on distributions by companies and mutual funds in IFSCs.

The Budget proposes to extend buyback tax to listed companies. This seems to have been done to check the practice of listed companies resorting to buybacks of shares instead of payment of dividends. This would effectively limit the quantum of distributions that listed companies make in light of the tax inefficiencies and does not make any economic sense. One fails to understand why policy makers do not appreciate that imposing an effective tax of more than 42% on profits distributed to shareholders is counterproductive to reviving animal spirits in the economy.

In the interim budget presented earlier this year, an impetus was given to technological development, creation of digital infrastructure and digitization of governance. To this end, the Budget proposes to implement e-assessments in a phased manner in order to eliminate human intervention, which would lead to simplification and greater transparency. Specifically, the Budget proposes: (i) online application for nil / lower withholding certificate for payments made to non-residents; and (ii) electronic filing of statements in respect of payment of interest income. Another important facet of the Budget is the introduction of pre-filled tax returns to taxpayers with the objective of reducing time and increasing accuracy in tax filing. It will be interesting to see how these changes actually benefit the taxpayer in practice.

Another interesting takeaway from the Budget has been the Government's increasing interest in environment protection measure which include incentivising the purchase and manufacture of e-vehicles, promote use of solar stoves and battery chargers in the country.

In summary, the Budget seems to give the picture that revenues for meeting expenditure are in place and hence there is no need to further widen the tax base. The tax measures proposed are limited to rationalization of existing provisions and providing a boost to certain targeted sectors. Whether the proposals will rekindle the flagging growth in the economy is something that will need to be seen in the coming months.

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