Though the Union Budget is primarily a statement of public finances, it has historically been a crucial occasion to signal India's economic policy direction and tempo. The 2022-23 Union Budget was presented in the midst of a Covid-19 wave, Omicron. The budget focused on building a governance and policy strategy for the next 25 year ‘Amrit Kaal’ period, while also seeking to continue measures undertaken over the last two years to support the economy affected by COVID-19. Key strategy areas are around a microeconomic welfare outlook to complement the macroeconomic growth outlook and promote digitalization and technology to recreate a virtuous CAPEX cycle. It is a balanced budget that emphasizes capital expenditure while contributing positively to the quality of fiscal policy.
With this background, we present the key highlights of the Union Budget 2022-23.
ECONOMY
• Total expenditure is pegged at Rs.39.45 lakh crore, up by 4.6% for FY23BE, whereas capital expenditure is pegged at Rs.7.5 lakh crore for FY23BE, a rise of 24.4% from FY22RE or 35.4% from FY22BE.
• Gross tax revenues are expected to grow by 9.6% in FY23BE, estimated to be at 10.7% of GDP for FY23BE and 11.9% of GDP for FY22RE. Indirect tax revenues are expected to rise by 5.7% for FY22RE.
• Effective Capital Expenditure of the Central Government is estimated at Rs.10.68 lakh crore in FY23BE, which will be about 4.1% of GDP.
• Nominal GDP growth for FY23 is pegged at Rs.258 lakh crore, 11.1% growth over FY22RE of Rs.232 lakh crore.
• Direct taxes for FY23BE are projected at 13.6% higher over FY22RE, at Rs.14.2 lakh crore; Indirect taxes are pegged at Rs.13.27 lakh crore, an increase of 5.7%
• Fiscal deficit projected at 6.4% of GDP for FY23BE as against the deficit of 6.9% for FY22RE, with an intent to reach a fiscal deficit level below 4.5% of GDP by 2025-26, with a fairly steady decline over the period.
• Disinvestment target for FY22RE lowered to Rs 0.78 lakh crore from Rs 1.75 lakh crore of FY22BE. FY23 disinvestment budgeted at Rs.0.65 lakh crore.
• Gross market borrowings are slated at Rs.14.95 lakh crore, while net market borrowings are slated at Rs 11.09 lakh crore.
Goals of "Amrit kal"
PM GATISHAKTI
• PM Gati Shakti National Plan will encompass the seven engines for economic transformation, seamless multimodal connectivity, and logistics efficiency.
• The seven engines are roads, railways, airports, ports, mass transport, waterways, and logistics.
INCLUSIVE DEVELOPMENT
• This category broadly covers Agriculture, Food Processing, MSME, Skill Development, Quality education, Digital University, National Tele Mental health program, HarGhar Nal se Jal and Housing for all.
PRODUCTIVITY ENHANCEMENT
• This category will cover Ease of doing business 2.0 and ease of living, e-Passport, Telecom sector, Atma Nirbharta in Defence, and Solar Power.
FINANCING OF INVESTMENTS
• This will include public capital investment, Green Bonds, VC and PE investments, Digital Rupee.
DIRECT TAX PROPOSALS
Tax Proposals for individual
• No change in tax slab rates, standard deduction, and deduction for interest on housing loans.
• 15% cap on a surcharge on long-term capital gains applicable to all asset classes.
Introduction of Updated return of income
• Taxpayer allowed to file an updated return of income within 24 months from the end of the relevant assessment year on payment of additional tax.
• If updated return filed within 12 months - additional tax payable at the rate of 25% of the aggregate of tax and interest payable.
• If updated return filed in the subsequent 12 months - additional tax at the rate of 50% of the aggregate of tax and interest payable.
Reduction in Alternate minimum tax rates and Surcharges for Co-operative Societies
• Alternate Minimum Tax to be reduced to 15% (from 18.5% currently) to ensure parity with the rate paid by companies.
• Surcharge has been reduced to 7% (from 12% presently) for those having total revenue between Rs 1 crore and Rs 10 crore
Extending the deadline for commencing manufacture or production
• The 15 percent tax rate for domestic manufacturing enterprises that commence manufacture or production by March 31, 2023, has been extended to March 31, 2024.
• Profit-linked tax exemption for eligible start-ups extended by another year – start-ups incorporated up to 31 March 2023 will now be eligible.
Virtual Digital Asset taxation
• Income from virtual digital assets taxable at 30%
• Cost of acquisition allowed as a deduction, however, no other deduction is allowed.
• Loss on the transfer of the virtual digital asset is not allowed for set-off or carry forward
purposes.
• Gifts of virtual digital assets will be a benefit taxable in the hands of the recipient.
• TDS at 1% introduced for virtual digital assets transactions.
Withdrawal of concessional rate of taxation on dividend income received from a specified foreign company
• Dividend received by an Indian company from a specified foreign company is taxable at a concessional tax rate of 15%. This tax rate now stands withdrawn.
Stripping of Bonus and dividends to be made applicable to securities and units
• Provisions of bonus stripping are now also applicable to units of InvITs/ REITs/ AIFs and securities.
• Provisions of dividend stripping are now also applicable to units of InvITs/ REITs/ AIFs.
Reduction in multiplicity of appeals before the High Court and Tribunal
• If an identical point of law is pending before the jurisdictional High Court or the Tribunal, revenue agencies can now wait to file an appeal before the High Court and Tribunal. Supreme Court including in the case of another taxpayer.
• Application for deferral to be filed only on receipt of acceptance from the taxpayer.
Rationalization of TDS/ TCS provisions on payments to non-filers of income tax returns
• Finance Act 2021 introduced higher rates of TDS/ TCS for payments to persons who have not filed tax returns for the last 2 years. However, the 2-year requirement has now been reduced to 1 year, i.e. higher TDS/ TCS rates shall apply only in the case of persons who have not filed tax returns in the immediately preceding year.
Other Tax Proposals:
• Tax relief to a person with a disability.
• Tax deduction increased to 14% on employer’s contribution to the NPS account of State Government employees.
• Non-residents' income from offshore derivative instruments or OTC derivatives issued by an offshore banking unit, royalties and interest on account of ship leases, and income earned through portfolio management services in the IFSC are tax-free, subject to certain circumstances.
• Health and education cess not allowable as business expenditure.
• Any surcharge or cess on income and profits is not allowed as business expenditure.
• No set-off of any loss shall be allowed against undisclosed income detected during
search and survey operations.
• The government has restored TDS applicable on commission income of insurance agents to TDS of 5% instead of 3.75%.
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INDIRECT TAX PROPOSALS
Custom/Excise Duty Proposals:
• Custom administration to be fully IT driven in SEZs.
• Last year's customs duty exemption for steel scrap was extended for another year to help MSME secondary steel producers.
• To encourage the efforts for blending of fuel, unblended fuel shall attract an
additional differential excise duty of ₹2/litre from October 01, 2022
Items where duty has been reduced:
• Custom duty on cut and polished diamonds and gemstones being reduced to 5% from 7.5%
• Reduction in the duty of fuel oil, straight-run fuel oil, low sulfur wax residue, and vacuum gas oil to 2.5% from 5%
• Nil rate on Iron and steel scrap including stainless steel scrap exemption available till 31.3.2022 is being extended by one year.
• Custom duty on S. G. Ingot Castings, Ball Screw & Linear Motion Guide used in the manufacturing of Plastic Processing Machinery, reduced from 10% to 7.5% and 7.5% to 5% respectively.
• Health cess on Surgical needles imported for manufacturing of Surgical sutures reduced to nil rate from 5%
• Custom duty on cashew nut in shell, pepper, long, and cloves has been drastically reduced.
Items where duty has increased
• Custom duty on Single or multiple loudspeakers, headphones, and earphones increased from 15% to 20%.
• Smart meters and printed circuit board assembly of smart meters increased to 25% & 20% respectively.
• Umbrellas customs duty increased from 10% to 20%.
• Custom duty on Microbial fats and oils and their fractions duty to 100% from 30%.
• Custom duty on Solar cells duty increased to 25% from 20% and solar molecules
increased to 40% from 20%
• Custom duty on recovered (waste and scrap) paper or paperboard used in
the manufacturing of paper, paperboard, or newsprint to now have 2.5% customs duty.
• Custom duty on Sodium cyanide increased to 10% from 7%
MARKET MOVEMENT
EQUITY MARKET
• The Union Budget 2021-22 had focused on boosting economic growth rather than just managing the fiscal deficit, therefore expectations for the Budget were quite high. The FY23 Union Budget indeed lived up to the expectations of a growth-focused budget that rightly emphasized the quality of expenditure while aiming to achieve robust economic growth. While the budget continued to address the supply-side constraints, the focus on demand-side challenges was lower than expected. However, it is crucial to highlight that budget expenditures are elevated levels vis-à-vis government spending in FY21 and FY22, which should assist deliver broad-based growth in the future.
• Equity markets ended in green on the Budget day. The S&P BSE Sensex closed at 58,863, an uptick of 1.4% while the Nifty 50 Index was up by 1.3% at 17,576.
• Among the Nifty sector indices, Metal (+4.5%), Pharma (+2.3%) and FMCG (+2.0%) were the top 3 sectors, while Auto (-0.8%), PSU (-0.6%) and Energy (-0.4%) were among the major losers.
• Among Nifty 50 stocks, Tata Steel (+7.5%), Sun Pharma (+6.9%) and IndusInd Bank (+5.8%) were the top gainers while BPCL (-4.6%), IOCL (-2.8%), and Tata Motors (- 2.6%) were among the major losers.
DEBT MARKET
• The budget has given precedence to growth over fiscal consolidation.
• For FY22, a growth of 9.2% has been projected, the highest for any large economy. However, the projected deficit for FY22 at 6.9% of GDP is also higher than the earlier estimates. For FY23, the budget deficit has been projected at 6.4% of GDP, with a tilt towards expansionary spending. Market borrowing is budgeted higher at Rs.14.95 tn.
• The higher projected borrowing has pushed yields higher on fixed income papers. Post the budget announcements, G-Sec yields moved up by about 14 to 45 bps for 2 to 10-year paper.
• The budget was a disappointment for the bond markets. Rates will gradually rise due to the much bigger borrowing objective and the global inclusion dampener. We expect the RBI to adjust monetary policy to factor the pro-growth budget and turn hawkish to counter the effects of anticipated inflation and the higher borrowing.
• Bond yields are anticipated to become more volatile, so investors should keep a close eye on their portfolios.