Six months on from her inaugural Union Budget 2019 speech in the parliament last July, finance minister Nirmala Sitharaman had the unenviable task of delivering some good news to both India Inc and the common folk. The worsening state of the economy meant that the Union Budget 2020 was expected to focus on reviving consumer demand, boosting the flagging NBFC and banking sectors, boost manufacturing and industrial production through tax cuts and export benefits, and address issues of capital and liquidity in the market.
At the same time, a lot of the focus has been in boosting infrastructure and socio-economic indicators through mega allocation, as Sitharaman highlighted several times during her Budget 2020 address.
Union Budget 2020 Themes And Focus Areas
For 2020-21, the focus of the government has been on increasing the ease of living through three themes — Aspirational India, Economic Development and Caring Society.
For the theme of Aspirational India, Sitharaman’s Union Budget 2020-21 focussed on aspects such as agriculture, irrigation and rural development; wellness, water and sanitation; and education and skill development. Under Economic Development, Sitharaman chose to allocate budget to industry, commerce and investments; infrastructure and the new economy — led by startups and the tech ecosystem. Finally, to create a ‘Caring Society’, the budget focussed on women and child welfare; culture and tourism; and environment and climate change.
Within these three themes, the Union Budget 2020 introduced a number of changes. Here are the major takeaways and highlights from the longest-ever Budget speech.
Key Highlights Of The Union Budget 2020
The headline-grabbing change has been in relation to the rate cut for personal income tax, which is bound to bring a lot of joy to middle-income India. But beyond that, there have been a number of changes that seek to eliminate the hurdles in compliance, taxation and other regulatory aspects.
Seed Fund For Startups
The government has proposed to provide early-life funding for startups, and instituting a seed fund to support ideation and development of early-stage startups.
However, it is unclear if this is the same seed fund which the ruling party had proposed in its pre-election manifesto. The NDA had announced plans to create an INR 20K Cr Seed Fund to go with the Startup India fund of funds as one of its key highlights in the pre-election season.
At present, there are over 416 venture funds who have a focus on the early-stage startups in India. But in 2019, the seed stage funding continued to fall across the major startup hubs in India. With $252 Mn in funding, the seed-stage deal value fell by 44% (compared to 2018) as only 306 seed funding deals were recorded. When it comes to early-stage seed funding, the Indian startup ecosystem is going through a slowdown.
Startups Get Tax Relief, ESOP Reforms
One of the most demanded changes by the startup ecosystem has been in the ESOPs taxation policy, as this is a key incentive for startups in attracting top talent. Sitharaman indicated this in her speech, “During their formative years, startups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees,”
Currently, ESOPs are taxable as at the time of exercise as well as the time of sale. This leads to a cash-flow problem for employees who do not sell shares immediately and continue to hold them over a long time “In order to give a boost to the startup ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest,” the finance minister added.
What’s unclear is whether the deferring of tax on the sale of ESOPs at the Budget 2020 means the end of double taxation. In fact, the language of the Union Budget 2020 speech does not spell out the fact that double taxation has been removed — it only talks about the deferred timeline for the applicability of tax.
ESOPs have become instrumental in the Indian startup ecosystem to woo high-value employees and retain talent. The likes of Razorpay, Oyo, Flipkart, Moglix, BharatPe have already announced their ESOP plans and even the buybacks. Exemption of taxes on ESOPs will further encourage companies to introduce ESOPs in their companies at a large level, which in turn will allow them to attract world-class talent while keeping employee costs in check.
Additionally, the government has reduced the tax burden for startups. An eligible startup with turnover up to INR 25 Cr is allowed to deduct of 100% of its profits for three consecutive assessment years out of seven years. In order to extend this benefit to larger startups, Sitharaman proposed to increase the turnover limit for this exemption from existing INR 25 Cr to INR 100 Cr.
“Moreover, considering the fact that in the initial years, a startup may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for the claim of deduction from the existing 7 years to 10 years,” the finance minister added.
Investment Clearance Cell and Boost For Entrepreneurship
“Entrepreneurship has always been the strength of India.”
Sitharaman lauded the men and women entrepreneurs who have exited the corporate life to contribute to India’s growth through startups. “They are risk-taking and come up with disruptive solutions to festering challenges,” the finance minister added.
INR 27,300 Cr has been allocated for the development and promotion of industry and commerce for the year 2020-21. To boost the support ecosystem and funding prospects for such startups, the government will set up an Investment Clearance Cell portal to offer “end to end” facilitation and support, including pre-investment advisory, and facilitate clearances.
To boost India’s domestic manufacturing and attract large investments in the electronics value chain, the FM proposed a scheme focussed on encouraging the manufacture of mobile phones, electronic equipment and semiconductor packaging. The scheme is likely to be adapted for manufacturing medical devices.
Aadhaar-Based Tax Verification
Sitharaman also sought to simplify tax assessment and verification of registered entities. With Aadhaar-based verification help in weeding out dummy or non-existent units. She also said that a system of cash reward will be envisaged to incentivise customers to seek invoice.
“Deep data analytics and AI tools are being used for the crackdown on GST input tax credit, refund, and other frauds and to identify all those who are trying to game the system. Invoice and input tax credit matching is being done wherein returns having mismatch more than 10% or above a threshold are identified and pursued,” the minister highlighted in her Budget speech.
MSME Compliance Made Easier
Sitharaman said that app-based invoice financing platform for MSMEs will be launched so that such small and medium businesses can avail of benefits from financial services providers on the basis of these invoices.
Further, to reduce the compliance burden on small retailers, traders and MSME sector as well as the assessment challenges for the income tax department, the government has proposed to raise the auditing threshold for MSMEs from INR 1 Cr in turnover to INR 5 Cr. While this is a welcome move, only a few MSMEs would be able to avail these benefits. The reduced compliance burden would be applicable to only those MSMEs that transact less than 5% in cash.
The number of merchants accepting digital payments modes has increased to over 10 Mn in a short span of two to three years. This shift can be attributed to driving factors such as robust payment infrastructure, the evolution of form factors, availability of structured data, the shift in consumer behaviour and the government’s vision of transforming India into a cashless economy.
In such a scenario, digitised invoice financing is a crucial move. Introduction of technologies like blockchain, AI and ML at the backend, can reduce the load of compliance for MSMEs. Invoice financing is a way for businesses to borrow money against the amounts due from customers. Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full.
Personal Income Tax Rate Slashed
Opening one of the most anticipated parts of the Union Budget, Sitharaman said, “In continuation of the reform measures already taken so far, the tax proposals in this budget will introduce further reforms to stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigations.”
Under the new simplified personal income tax regime, an individual shall be required to pay 10% tax on INR 5 Lakh – INR 7.5 Lakh from the current 20%, while those having income under INR 5 Lakh will not have to pay any tax. Here are the rest of the changes in the income tax slabs:
|Income Bracket||Tax (2020-2021)||Tax (2019-2020)|
|Above 15 Lakh||30%||30%|
Sitharaman added that around 70 deductions and exemptions have been removed in the simplified tax regime to make matters easier for taxpayers and assessors. Will this drive up the revenue from tax collection?
If nothing else, the changes are likely to drive demand up in a number of consumer-facing industries. New slab introductions and an increase in the income limit for the existing slabs will immensely help address the low consumer spending and boost savings in banks.
Big Boost For Skill Development, Specialised Education
Allocating INR 99,300 Cr for the education sector in 2020-21 and INR 3K Cr for skill development. Sitharaman said that steps would be taken to enable sourcing capital through external commercial borrowings and FDI in the education sector.
“Students in the general stream (vis-à-vis services or technology stream) need their employability improved. About 150 higher educational institutions will start apprenticeship embedded degree/diploma courses by March 2021.”
Sitharaman also proposed a programme to enable urban local bodies in providing internship opportunities to fresh engineers for up to one year. To provide high-quality higher education to students, the government proposed to start a degree-level full-fledged online education programme. This shall be offered only by institutions who are ranked within the top 100 in the official rankings.
Under the Ind-SAT Study in India programme, students from Asian and African countries will receive scholarships for studying in Indian higher education centres.
Finally, to improve the employability of Indians in the global market, the government has proposed special bridge courses to bring in equivalence across borders, satisfy language requirements and conduct special training for workers such as teachers, nurses, para-medical staff and care-givers.
New Economy, Quantum Technologies Come Into Focus
Focusing on emerging technologies and the so-called “new economy”, Sitharaman highlighted the need to create innovations that disrupt established business models in her Budget 2020 speech. “Artificial intelligence, Internet-of-Things (IoT), 3D printing, drones, DNA data storage, quantum computing, and more are re-writing the world economic order. India has already embraced new paradigms such as the sharing economy with aggregator platforms displacing conventional businesses.”
The government will release a policy to enable private sector companies to build data centre parks throughout the country. Further, all “public institutions” at village level will be provided with digital connectivity through the BharatNet programme, which envisions linking up 100K gram panchayats this year with INR 6000 Cr allocated.
“A digital platform would be promoted that would facilitate seamless application and capture of IPRs. Also, in an Institute of Excellence, a centre would be established that would work on the complexity and innovation in the field of intellectual property.”
A big part of the focus on emerging technology will be on quantum technology and computing. “It is expected that lots of commercial applications would emerge from theoretical constructs which are developing in this area. It is proposed to provide an outlay of INR 8000 Cr over a period of five years for the National Mission on Quantum Technologies and Applications,” Sitharaman added.
The finance minister also said that Knowledge Translation Clusters would be set up across different technology sectors including new and emerging areas, in addition to technology clusters, testbeds and small-scale manufacturing facilities.
Mega Logistics And Infrastructure Projects Envisioned
While speaking about the mega infrastructure projects and plans by the government in this regard, the FM said, “A National Logistics Policy will be released soon. It will create a single-window e-logistics market and focus on the generation of employment, skills and making MSMEs competitive.”
Overall, INR 1.70 Lakh Cr has been allocated for transport Infrastructure in 2020-21. The national policy will include the development of 2500 Km access control highways, 9000 Km of economic corridors, 2000 Km of coastal and land port roads and 2000 Km of strategic highways. Sitharaman said the government would complete the Delhi-Mumbai Expressway by 2023, while a Chennai-Bengaluru Expressway would also be started.
“High-speed train between Mumbai to Ahmedabad would be actively pursued. 148 Km long Bengaluru Suburban Transport project at a cost of INR 18,600 Cr.”
To boost revenue from toll tax, at least twelve lots of highway bundles would be monetised through FAStag system over 6000 Km before 2024, as highlighted by the FM. Further in rail transport, the railway ministry aims to achieve electrification of 27000 Km of tracks, four station redevelopment projects and operation of 150 passenger trains through public-private partnerships.
Sitharaman also said that 100 more airports would be developed by 2024 to support the Udaan scheme.
Finally, the Budget 2020 speech highlighted, “There is a case for maximising the benefits of upcoming economic corridors, revitalisation of manufacturing activities and technology and the demands of aspirational classes.” Focussing on this convergence, the government has proposed to develop five new smart cities in collaboration with states.
Women-Focussed Policies And Social Welfare Development
The budget provides for about INR 28,600 Cr for programmes dedicated to women empowerment and gender inclusion. This includes a task force to study the impact of early pregnancies on the mortality rates of expectant mothers.
The government is also determined to eliminate manual cleaning of sewer systems or septic tanks. The Budget 2020 speech highlighted that suitable technologies for such tasks have been identified by the Ministry of Housing and Urban Affairs and financial support for wider acceptance of such technologies will be provided.
Committing towards the welfare of Scheduled Castes and Other Backward Classes, Sitharaman proposed a budget allocation of about INR 85,000 Cr for 2020-21, and INR 53,700 Cr for the development and welfare of Scheduled Tribes.