India’s Union Budget 2021: Key Provisions Foreign Investors Should Track
– India’s 2021 Union Budget was released on February 1, with major spending hikes promised for healthcare, infrastructure, and capital expenditure.
– Changes announced in the definition threshold for small companies to ease compliance as well as modifications for One Person Companies that can now be set up by NRIs.
– FDI limit raised to 74% and other amendments proposed for insurance sector to allow foreign ownership and control with safeguards.
– A revised customs duty structure is in the works and will be rolled out October 1, 2021.
– INR 350 billion set aside for India’s COVID-19 vaccination program in 2021-22.
– The theme of this year’s budget is economic revival and boost to government spending rather than fiscal control seen in previous years.
India’s Finance Minister Nirmala Sitharaman presented an expansionary budget this morning – geared towards pushing the country into long-term economic recovery mode after the COVID-19 pandemic.
Signaling the government’s ambition in this regard, the budget revised the fiscal deficit for the current fiscal year at 9.5 percent of the GDP and targeted 6.8 percent of GDP for fiscal year 2021-22. Sitharaman also announced that gross government borrowing will be INR 12 trillion (US$164.16 billion).
India plans to bring down the fiscal deficit estimate to 4.5 percent by 2025-26, which means subsequent budgets can also be expected to be expansionary.
India’s 2021 Union Budget
The pillars of the 2021 Union Budget are: health and wellbeing, capital and infrastructure, inclusive development, reinvigorating human capital, innovation and R&D, and minimum government and maximum governance.
Below are key highlights from Finance Minister Sitharaman’s 2021 Union Budget speech.
- INR 1.97 trillion (US$26.99 billion) for Production-Linked Incentive (PLI) schemes in 13 sectors to enable them grow in scale and size, boost job creation, and position Indian manufacturing hubs within the global supply chain.
- Big hikes in capital outlays were announced for rural and urban healthcare, railways, and infrastructure as well as reform initiatives for the power, ports, oil and gas, and aviation sectors. Also, a big thrust on monetizing assets.
a) Highway infrastructure work proposed include building 8,500 km of highways by March 2022.
b) Railways will monetize dedicated freight ways.
c) In the power sector, the Budget promises to empower the consumers in the selection of distribution companies. INR 3.059 trillion (US$41.92 billion) over five years for revamped, reforms-based, and result-linked new power distribution sector scheme. Further, a comprehensive National Hydrogen Energy Mission 2021-22 is expected to be launched.
d) ‘MetroLite’ and ‘MetroNeo’ technologies to provide metro rail systems at lesser cost in Tier 2 cities and peripheral areas of Tier 1 cities.
e) Seven projects worth INR 20 billion (US$274.04 million) to be offered in PPP-mode in FY 2021-22 for the operation of major ports. Indian shipping companies to get INR 16.24 billion (US$222.52 million) worth subsidy support over five years in global tenders of Ministries and Central Public Sector Enterprises (CPSEs).
- There has been a 137 percent increase in allocation for the healthcare sector over the previous, the focus being preventive and curative healthcare, well-being, and healthcare systems in rural and urban areas across primary, secondary, and tertiary centers. A INR 641.8 billion (US$8.78 billion) spending plan for healthcare was announced in the budget over the next six years.
- INR 350 billion (US$4.78 billion) has been set aside for India’s COVID-19 vaccination program in 2021-22.
- For the automobile sector, a voluntary vehicle scrappage policy was announced. Personal vehicles are to undergo fitness tests after 20 years and commercial vehicles after 15 years. This would help reduce pollution and oil import bills.
- In terms of indirect taxes, the Finance Minister proposed increasing the customs duty of various parts, including ignition wiring sets, safety glass, and parts of signaling equipment, to 15 percent with effect from February 2, 2021.
- As per Union Budget 2021, the government will increase the foreign direct investment (FDI) limit in the insurance sector from 49 percent to 74 percent.
- An amendment to the Insurance Act, 1938 will also allow foreign ownership and control with safeguards. According to Finance Minister Sitharaman: “Under the new structure, majority of directors on board and key management persons will be resident Indians, with at least 50 percent directors being independent directors and specified percentage of profits being retained as a general reserve.”
- In the current scenario, only India residents have been allowed to own an insurance sector firm. The proposed amendments, experts say, could pave the way for PE funds to enter the insurance sector.
- India will establish seven textile parks over three years under the Mega Investment Textile Parks (MITRA) scheme.
- The seven parks will be set up over 1,000 acres of land – with world class infrastructure and plug-and-play facilities.
- This will be in addition to the INR 106.83 billion (US$1.46 billion) production linked incentive (PLI) scheme for technical textiles and manmade fibers.
- India wants to promote export-oriented production and keen to attract large foreign investment in this space.
Customs duty structure to get revised
- More than 400 old customs duty exemptions are to be reviewed by the government, and from October 1, this year, a revised customs duty structure will be put in place.
Some customs duty changes
- The government intends to reduce customs duty uniformly to 7.5 percent on non-alloy, alloy, and stainless-steel products and exempt duty on steel scrap till March 2022.
- Duty on copper scrap will be reduced from 5 percent to 2.5 percent to give relief to copper recyclers.
- Customs duty on cotton is raised from 0 percent to 10 percent; on raw silk and silk yarn from 10 percent to 15 percent.
- Custom duty exemptions on tunnel boring machines will be withdrawn
- To support domestic manufacturing in the solar sector, the duty has been increased for solar inverters from five percent to 20 percent.
- One person companies (OPCs) will be allowed to get incorporated with no restriction on paid-up capital and turnover. Non-resident Indians will be allowed to incorporate such one person companies and the residency limit for an Indian citizen to set up an OPC will be reduced from 182 days to 120 days. This will be beneficial for start-ups and innovators.
- Changes have been proposed to the definition of small companies under the Companies Act, 2013. Now, companies with paid-up capital up to INR 20 million (US$273,607) and turnover up to INR 200 million (US$2.73 million) will qualify as small companies. Previously, the threshold of paid-up capital was INR 5 million (US$68,402) and turnover limit up to INR 20 million. This change in definition will extend small company status to more than 200,000 companies, easing their compliance requirements as a result.
- Budget 2021 also announced plans to decriminalize the Limited Liability (LLP) Act, 2008.
Tax audit limit increased for certain SMEs
- Last year, under the Finance Act 2020, to reduce the compliance burden on small and medium enterprises (SME), the threshold limit for auditing a person conducting business was increased from INR 10 million to INR 50 million in cases where: (i) the aggregate of all receipts in cash during the previous year does not exceed five percent of such receipt and (ii) aggregate of all payments in cash during the previous year does not exceed five percent of such payment.
- To promote digital transactions as well as further reduce the compliance burden of SMEs, Budget 2021 has proposed to increase this threshold from INR 50 million to INR 100 million in the abovementioned cases.
- This amendment will take effect from April 1, 2021 and apply for the assessment year (AY) 2021-22 and subsequent assessment years.
Re-opening income tax assessment cases
- The Union Budget 2021 has proposed reducing the time limit for reopening income tax assessment cases to three years from six years, while for serious tax fraud cases – this will be 10 years if the concealment of income is INR 5 million or more.
Individual tax liability
- Direct taxes were left unchanged with incentives announced to ease compliance for taxpayers.
- The government intends to announce rules to eliminate double tax liability for NRIs on foreign retirement funds.
- The finance minister announced that soon pre-filled income tax returns with details on capital gains from listed securities, dividend income, and interest income from banks and post offices would be available to ease tax filing process.
- It was also proposed that the advance tax liability on dividend income arise only upon payment of the dividend. Last year, the finance ministry abolished the dividend distribution tax for companies and made it taxable in the hands of the shareholders.
- The government is planning a dispute resolution committee for small taxpayers with taxable income of up to INR 5 million (US$68,402) and disputed income of up to INR 1 million (US$13,680). Till date, 11 million taxpayers have availed the Direct Tax Vivad Se Vishwas scheme to resolve tax disputes.
- The Budget 2021 proposed setting up a faceless dispute resolution committee for individual taxpayers (Income Tax Appellate Tribunal).
- Senior citizens above 75 years receiving only pension/interest income do not need to file tax returns. This is because banks paying the interest would deduct the tax on their behalf.
- Interest earned by Provident Fund (PF) contributions above INR 250,000 (US$3,420) a year will now be taxed at normal rates – applicable only to employee contributions. This will impact high-income salaried individuals using the voluntary PF to earn tax-free interest.
- India’s income tax return filers increased to 64.8 million in 2020 from 33.1 million in 2014.
Extension of tax holiday
- The government will extend the eligibility of tax sop on home loans till FY 2022.
- Affordable housing projects can avail their tax holiday for a year more.
- Tax holiday for start-ups has also been extended by one more year, to March 31, 2022.
- The budget announced a tax exemption for relocating funds to IFSC GIFT City and a tax holiday for the aircraft leasing business in GIFT City – steps towards establishing the area as a global financial hub. Currently, most aircraft leasing companies are located in Ireland, Dubai, and Hong Kong.
Labor market and hiring
- Minimum wage standards will now apply to all categories of workers. They will all be covered by the Employees State Insurance Corporation.
- For the employers, the labor compliance burden will be reduced with a single registration and licensing process, and a provision to submit returns online.
- Women will be allowed to work in all employment categories, including nightshifts, but adequate protection must be in place.
- To bring them into the organized sector, the finance minister has proposed setting up a portal to collect information on gig and platform workers in the country. The finance minister said, “The portal will help formulate health, housing, skill, insurance, credit, and food schemes for migrant workers.”
- The Agri Infrastructure and Development Cess was announced on a number of items. Under Budget 2021, it is proposed as INR 2.5 per liter of petrol, INR 4/liter of diesel, and 100 percent on alcoholic beverages.
- In a push to further localize production, the government raised basic customs duty on import of sub-parts of mobile phones and battery chargers from nil to 2.5 percent in FY 2021-22. This could raise the price of imported mobile phones.
- Air conditioners, refrigerators, LED lights, and mobile phones, among other items, could get more expensive. Here’s why – Budget 2021 has hiked customs duty on the following imported parts – compressors for refrigerators and air conditioners, LED lamps, PCB, raw silk, cotton, solar inverters and lanterns, auto parts like safety and toughened glasses, windscreen wipers, signaling equipment, mobile parts like PCBA, camera modules, connectors, back covers, side keys, mobile charger components, inputs or raw material of lithium ion battery, ink cartridges and ink spray nozzle, finished leather products, nylon fiber and yarn, plastic builder wares, cut and polished synthetic stones, including cut and polished cubic zirconia.
- Rationalization in customs duty on gold and silver will result in them becoming cheaper.