India’s Union Budget 2019-20: Roadmap for a US $5 Trillion Economy

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India-Briefing- India’s Union Budget 2019-20 Roadmap for a US $5 Trillion Economy

The government of India, in its budget 2019-20, has outlined several steps to achieve high economic trajectory. In this article, India Briefing provides an overview of key announcements and proposals made to achieve the target. 

On July 5, the new Prime Minister Narendra Modi’s government announced the first budget of its second term with a focus to drive India to higher economic growth and become a US$5 trillion economy in the next five years.

Built on the foundation of the interim budget 2019-20, the budget outlines several steps to achieve high economic trajectory, including a massive push for investments – both foreign and domestic – and INR 100 lakh crore (US$1,459 billion) in infrastructure spending.

Below is an overview of key announcements and proposals made in the Union Budget 2019-20.

Foreign direct investment relief

With a view to attracting more foreign investment, the budget proposes to open FDI further in sectors such as media, aviation, insurance, and AVGC (Animation, Visual effects, Gaming, and Comics).

The government has also announced a relaxation on stringent local sourcing norms for the single brand retail scheme– opening doors to the big foreign firms that domestic consumers crave. The new rules allow foreign companies investing over US $200 million to open online stores in India, before setting up brick and mortar shops.

Tax relief for sunrise industry investments

The budget invites global companies to set up mega-manufacturing plants in sunrise industries –such as semi-conductor fabrication (FAB) – through competitive bidding. Investors will be incentivized to set up units in areas such as solar photovoltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers, and laptops.  

The scheme will give the global companies access to investment linked income tax exemptions under Section 35 AD of the Income Tax Act, and other indirect tax benefits.

Corporate taxes reduced

The budget has reduced corporate tax to 25 percent for companies with turnover up to INR 400 crores (US $58.4 million) – a long-standing demand by corporates.

This brings 99.3 percent of the companies operating in India under the lower corporate tax slab. Previously, the 25 percent tax rate was available to businesses with an annual turnover of up to INR 250 crores (US $36.5 million).

Individual taxes increased for high-net worth

The budget has not changed the rate of taxation for any category of taxpayers.

However, it has raised the surcharge for those in the higher salary brackets – a 3 percent increase for individuals earning between INR 3 crores (US $437,820) and INR 5 crores (US $729,700), and 7 percent for those earning above INR 5 crore (US $729,700) per annum. The surcharge is added over and above the marginal tax, making the effective tax rate higher for the high net worth individuals.

For individual taxpayers, including the salaried class, pensioners, and senior citizens, with a taxable income of INR 5 lakh (US $7,297), the budget has proposed a full tax rebate.

Aadhaar card rules changed

The budget has proposed to make the Aadhaar card and Permanent account number (PAN) interchangeable. 

This means that taxpayers who do not have a PAN can use the Aadhaar number, and vice versa, to file income tax returns and conduct other financial transactions, for instance, mutual fund investments, buying gold, and others.

The budget has also eased the criteria of obtaining Aadhaar for Non-resident Indians (NRIs) who hold Indian passports. NRIs can now obtain the Aadhaar number immediately on arrival in the country, without waiting for the mandatory 180-day period.

Deduction for electric vehicle purchases

For the faster adoption of electric vehicles (EVs), the finance minister has proposed an income tax deductions of INR 1.5 lakh (US $2,189) to taxpayers on the interest paid on the loans taken to purchase EVs.

The government previously advised the GST Council to lower the tax rate on electric vehicles from the existing 12 percent to 5 percent.

Digital economy development

To give a push to the digital economy and encourage cashless payments by businesses, the budget has proposed a two percent tax deduction at source (TDS) on cash withdrawals exceeding INR 1 crore (U S$145,940) in a year from a bank account.

Further, the budget requires business establishments with an annual turnover of more than INR 50 crore (US$ 7.3 million) to offer low-cost digital modes of payment to their customers.

Items that will become cheaper or costlier

In the budget, the finance minister announced several customs duty proposals for promoting Make in India, clean energy, and extending protection to the MSME sector. This includes raising customs duties on a number of products, withdrawing exemption from some, and lowering rates for others to encourage value addition.

As a result, a large number of items are set to get more expensive after the budget comes into effect. These include petrol, diesel, gold, silver, cigarettes, imported stainless steel products, imported auto parts, split air-conditioners, loudspeakers, raw materials for the manufacture of soap, optical fiber, and ceramic tiles and wall tiles among others.

Electric vehicle components, camera module and charger of mobile phones, set top box, import of defense equipment not manufactured in India, are among the items that will become cheaper.

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