FM Sitharaman likely to focus on growth, infrastructure revamp under Modi 3.0

The upcoming Budget has raised expectations for changes to the capital gains tax regime. Experts are advocating for a more streamlined approach with uniform tax rates across different categories. When compared to global capital gains tax rates, Indian rates typically align favorably or are comparable to economies such as the United States and the United Kingdom, where the headline rate is 20 percent, as reported by tax and consultancy firm PwC. In other countries like Norway, capital gains are taxed under personal income tax rates, while France imposes a higher rate of 30 percent, along with an additional 4 percent exceptional income tax for high-income earners.

The GST Council's recommendation to insert Section 11A into the Central Goods and Services Tax Act, 2017, aims to empower the government to regularize instances where GST was not levied or was under-levied due to common trade practices. This amendment is anticipated to provide relief to sectors such as real-money gaming (RMG) companies and those involved in corporate guarantees.
RMG companies, specifically, have faced GST notices for the period spanning July 2017 to March 2023. The proposed amendment, once passed through the finance bill in Parliament, is expected to address these retrospective GST issues, providing clarity and potentially reducing tax liabilities that arose from past interpretations.

The upcoming Union budget is expected to feature amendments to the Goods and Services Tax (GST) Act, particularly focusing on empowering the GST Council to retract tax notices issued retrospectively. This move is set to benefit sectors such as online gaming and corporate guarantees.
According to sources familiar with the matter, the finance bill is likely to include the insertion of Section 11A into the Central Goods and Services Tax Act, 2017. This amendment will allow the government to regularise instances where GST was not levied or was under-levied, based on recommendations from the GST Council. Such cases typically arise from common trade practices. Learn more.

Subsidised healthcare services or medications could ease the burden of medical expenses. Lower rates or subsidies on utilities like electricity and water can help manage living expenses. Introducing senior citizen-specific financial products with better interest rates or terms could further support their financial planning.
These measures aim to not only provide immediate relief but also promote financial security and quality of life for senior citizens, acknowledging their contributions and needs in society.

Senior citizens are advocating for a revision in the lock-in periods under Section 80C for various investments such as fixed deposits (FDs), National Savings Certificates (NSC), and Equity-linked Savings Schemes (ELSS). Currently, these investments qualify for tax deduction under Section 80C, with lock-in periods ranging from 3 years (for ELSS) to 5 years (for NSC and FDs). The request is to lower these lock-in periods to accommodate the liquidity needs of senior citizens, particularly for their physical well-being and medical care expenses. This adjustment would provide greater flexibility in managing their investments while still enjoying tax benefits, thereby addressing their immediate financial needs more effectively.

Currently, Section 194P of the Income Tax Act exempts senior citizens aged 75 years and above from filing income tax returns, subject to certain specified conditions. Senior citizens are advocating for this exemption to be extended to those aged 60 years and above to alleviate the hardship involved in filing their returns. This extension would provide much-needed relief to a larger group of senior citizens, simplifying their financial management and reducing their administrative burden.

Current provisions allow for a deduction of Rs 50,000 for any mediclaim premium or medical expenditure incurred by a senior citizen. Given the rising medical costs, senior citizens are hoping the threshold limit will be increased to Rs 1 lakh.

In the interim budget 2024, the Samagra Shiksha Abhiyan, the government’s flagship programme for pre-primary to higher secondary level schools, was allocated Rs 37,500 crore, marking a 12.76 percent increase from the Rs 33,000 crore (revised estimates) in 2023-24.
For FY25, the Union government-owned public technical institutes — Indian Institutes of Technology (IITs) — received Rs 10,324 crore (budget estimates), slightly down from the Rs 10,384 crore (revised estimates) in FY24.

Educationists are hopeful that the first Budget of Modi 3.0 will see a significant increase in the allocation for the education sector with an emphasis on research. They have called for greater investment in research to foster innovation and keep pace with global advancements, stating that strengthening these capabilities is crucial for India’s growth in science, technology, and other critical areas.

Enhanced funding in research and development is seen as essential for building a robust educational foundation that can drive the country towards a knowledge-based economy.

To align with the government's vision of “housing for all,” reintroducing section 80EEA, which allowed a deduction for interest paid on home loans for affordable housing, is highly anticipated. This section, which benefitted first-time homebuyers, was not extended beyond March 2022. Reinstating this deduction would provide significant relief and support to individuals aspiring to own their first home, thereby furthering the goal of making housing accessible to all.

To reduce carbon emissions, the government has been promoting electric vehicles (EVs) through various schemes and subsidies. With a target for EVs to comprise 30 percent of all vehicle sales in the country by 2030, incentives such as those under the FAME II scheme are crucial, according to Deloitte.

The introduction of section 80EEB in the Income Tax Act in 2019 allowed a deduction of up to Rs 1.5 lakh per annum on interest paid for EV loans. This was a significant step, but the benefit was not extended beyond March 2023. Extending and raising the deduction to Rs 2 lakh a year would greatly encourage EV adoption, Deloitte noted.

Since the new tax regime is now the default option, extending benefits to the old tax regime, where many employees still prefer to avail HRA exemptions and 80C deductions, would be a welcome move. An increase in the standard deduction from the current Rs 50,000 would offer further relief, Deloitte further noted.

The rental market in major cities such as Bengaluru, Hyderabad, Pune, and Gurugram has seen a remarkable resurgence post-pandemic, with over 30 percent year-on-year growth in 2023. This surge, driven by the reopening of offices and the shift to hybrid work models, underscores the need to review HRA deductions.

The salaried class will be closely monitoring the upcoming full budget for FY25 in hopes of securing tax breaks amid rising living costs.
According to Deloitte, salaried individuals are looking for a revamp of tax slabs, adjustments to housing rent allowance (HRA) rates, incentives for electric vehicle (EV) sales, and a bigger push for affordable housing in the Budget 2024.

Rajesh Magow, Co-founder & Group CEO of MakeMyTrip, believes that now is an opportune time for the Finance Minister to build on the current momentum in the travel and tourism industry and introduce changes to incentivise industry players.

He stated, "The Travel and Tourism industry has been growing at a healthy rate post-pandemic. The upcoming Union Budget 2024-2025 offers an opportunity for the Hon’ble Finance Minister to build on this momentum. Strategic investments in this sector can unlock economic opportunities, boost employment, and enhance the competitiveness of India's tourism landscape".

India's transportation infrastructure is set for substantial upgrades with significant budget allocations: Rs 2.55 lakh crore for enhancing Indian Railways and Rs 2.78 lakh crore for road transport and highways. The focus on railways includes upgrading rail bogies to Vande Bharat standards and developing three economic corridors, aimed at boosting efficiency, connectivity, and revenue growth. Meanwhile, the road sector aims to expand the national highway network with projects totaling Rs 79,789 crore, targeting over 6,270 km of new highways to improve goods and passenger transportation across the nation.

India is set to significantly bolster its defence sector with a budget allocation of Rs 6.21 lakh crore, marking a 4.72 percent increase from the previous year. The emphasis will be on enhancing military capabilities through modernised infrastructure and ramping up domestic manufacturing. Key initiatives will prioritize the development of advanced weaponry, naval vessels, and missile defence systems, aligning with the government's target of achieving a $25-billion defence output by 2025.

The upcoming Union Budget for FY25 is poised to sharpen its focus on critical sectors such as defence, railways, infrastructure, and renewable energy. Experts anticipate significant allocations and strategic initiatives aimed at fostering growth in these domains, aligning with India's long-term development objectives under Prime Minister Narendra Modi's third term. Expect priorities to include bolstering military capabilities, modernizing railways, expanding infrastructure networks, and advancing renewable energy initiatives, defining the core themes of the budget.

With the Union Budget 2024-25 set for presentation on July 22, senior citizens, a significant segment of taxpayers, have compiled their wish list for Finance Minister Nirmala Sitharaman.

One key demand on their agenda is a higher threshold for mediclaim premiums, currently capped at Rs 50,000 for deductions on medical expenses incurred by senior citizens. With healthcare costs escalating, experts like Suresh Surana, a seasoned chartered accountant, emphasized in the Economic Times the need to raise this limit to Rs 1 lakh.

During the recent extended election campaign, Prime Minister Narendra Modi repeatedly emphasized that what the country has witnessed so far is just a preview, with significant transformative changes poised to shape India's economy and pave the way for a robust foundation leading to Viksit Bharat by 2047.

Adding to this narrative, President Murmu, in her inaugural address to the joint session of Parliament post-election in June 2024, underscored that the upcoming Budget would introduce unprecedented measures and outline a visionary blueprint for growth. She also affirmed that the pace of reforms would be expedited to accelerate progress. Read more, here!

Under the Employees' Provident Fund (EPF) and Miscellaneous Provisions Act, employers are required to pay contributions within 15 days of the end of each month. Failure to do so may result in appropriate action by the commissioner.

However, experts note that in the staffing industry, payments depend on inputs from the principal employer, leading to occasional delays in remitting statutory payments.

Nagesh Bailur, Chief Financial Officer of Randstad India, stated, "Since these delays are not directly attributable to staffing companies, we urge the government to consider waiving this clause specifically for staffing service providers."

The staffing industry and HR leaders are hopeful for significant tax breaks and increased investment in skill development in the upcoming full budget for fiscal year 2025, set to be presented by Finance Minister Nirmala Sitharaman later this month.

Currently, employment services in India are subjected to an 18 percent Goods and Services Tax (GST), which applies to a wide range of services including executive search, recruitment, permanent placement, and contract staffing.

Suchita Dutta, Executive Director of the Indian Staffing Federation (ISF), advocates for employment-related services to be reclassified as ‘merit services’ with a reduced GST rate of 5 percent.

The Capitalmind study analysed market trends surrounding budget announcements, revealing a pattern of cautious investor behavior. In the week leading up to budget days, investors typically reduce their market exposure, resulting in median returns of -1.4 percent one week before and -2.2 percent one month before the budget day.

Investing on the eve of the budget carries a 54 percent chance of yielding negative returns after one month. The study observed a mirrored trend around budget days: uncertainty prompts investors to pull back, leading to negative returns 63 percent of the time one week before. Post-budget, investor confidence returns, resulting in positive returns 62 percent of the time.

According to a recent study by Capitalmind, Union Budgets have shown limited correlation with annual equity returns. The CNX500 index has recorded a median return of -0.1 percent on budget days since 2000.

The study highlights February 1, 2021, as the best performing budget day with a gain of 4.1 percent, while July 6, 2009, marked the worst performance with a decline of -5.4 percent.

Researchers observed that investors tend to adopt a cautious approach around budget announcements, reducing their market exposure in the week leading up to the event and gradually re-entering positions in the week following the budget.

In the 2023-24 budget, the government announced an enhanced corpus under a revised scheme, facilitating an additional Rs 2 lakh crore in collateral-free credit for MSMEs. Concurrently, Budget 2017-18 raised the permissible provision for banks' non-performing assets from 7.5 percent to 8.5 percent.

According to the Micrometer report by the Microfinance Institutions Network (MFIN), the microfinance sector exhibited robust growth in the January-March quarter of the fiscal year 2023-24. During this period, MFIs recorded a 23.6 percent year-on-year growth in their loan portfolio. Banks saw a growth of 20.9 percent, small finance banks (SFBs) 28.4 percent, and other NBFCs 37.5 percent in the same period.

Industry stakeholders in the microfinance sector are advocating for dedicated government support through special fund allotments in the upcoming Union Budget for 2024-25. HP Singh, chairman-cum-managing director of Satin Creditcare Network, highlighted the sector's strong post-pandemic growth and emphasized that additional funding from the budget could further accelerate this momentum. He stressed the importance of enhancing financial inclusion, particularly in underserved rural areas. Nishant Lakkar, founder and CEO of AAA Rating Consultants and Advisors, echoed these sentiments, urging for targeted funding to support microfinance institutions (MFIs) with a specific focus on small and medium enterprises (SMEs).

Between FY19 and FY24, NHM (National Health Mission) spending grew at a compounded annual rate of 5.2%, while the Pradhan Mantri Jan Aarogya Yojana under NHM saw a substantial 27.7% increase.

In FY24, PM-JAY expenditures reached Rs 6,800 crore, up from Rs 2,000 crore in FY19. The scheme offers cashless benefits up to Rs 5 lakh annually per family in listed hospitals.

PM-JAY's impact includes 68.6 million hospital admissions, with 1.9 million in the past month. Southern states like Tamil Nadu (9 million admissions) and Karnataka (6.6 million) have benefited most.

The government's interim budget allocated Rs 90,658 crore to health, with capital expenditures set to rise to 4.8% from the previous year's 3.4%.

Health spending has stagnated over the past decade, with the central government allocating only 0.3 percent of the GDP towards healthcare, as per a Moneycontrol analysis.

During the pandemic, health spending temporarily increased to 0.41 percent of GDP but has since dropped to 0.28 percent.

Capital spending has remained consistent, averaging 3.7 percent from FY22 to FY24.

The National Health Mission's share, a key ministry initiative, has also decreased. It accounted for over 60 percent of total health expenditure before the pandemic but now stands at 54.6 percent, its lowest in a decade as of FY24.

In a bid to curb carbon emissions, the government has actively promoted electric vehicles (EVs) through various schemes and subsidies.

Deloitte emphasised the importance of incentives like those offered under the FAME II scheme, crucial to achieving the target of EVs constituting 30 percent of all vehicle sales in India by 2030.

The introduction of section 80EEB in the Income Tax Act in 2019 allowed for a deduction of up to Rs 1.5 lakh annually on interest paid for EV loans. However, this incentive expired in March 2023. Extending and increasing the deduction to Rs 2 lakh per year would significantly bolster EV adoption, according to Deloitte.

The salaried class eagerly awaits Finance Minister Nirmala Sitharaman's presentation of the FY25 budget later this month, hopeful for tax reductions amidst escalating living expenses.

Deloitte reports that salaried individuals are advocating for revised tax slabs, adjustments in Housing Rent Allowance (HRA) rates, incentives for electric vehicle (EV) sales, and increased support for affordable housing in Budget 2024.

The budgetary adjustments in 2023 introduced several modifications to the new personal tax regime, including raising the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh and reducing the surcharge on incomes exceeding Rs 5 crore from 37 percent to 25 percent. These changes aimed to enhance the attractiveness of the new tax regime, while rates in the old regime remained unchanged, underscoring the need for substantial reforms in its slab structure.

Analysts at Deloitte suggest there is mounting speculation that the government may elevate the income tax exemption threshold under the new regime to Rs 5 lakh from the current Rs 3 lakh.

Economists hold contrasting views on the possibility of a personal income tax cut in the forthcoming budget.

"We do not foresee any tax adjustments in this budget," remarked Jethmalani.

Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA, anticipates an increase in tax and non-tax revenues by approximately Rs 1.2 lakh crore compared to the estimates in the Interim Budget for FY2025.

Some economists argue that if there is a reduction in income tax rates, the fiscal deficit could remain at the projected levels.

"If there is an income tax cut, we expect the fiscal deficit to be maintained at 5.1 percent of GDP," stated Sen Gupta.

Economists speaking to Moneycontrol on July 2 anticipate the Finance Ministry's continued focus on fiscal consolidation and a reduction in fiscal deficit compared to earlier projections made in the interim budget in February.

"We expect the budget to maintain its emphasis on fiscal consolidation while prioritizing growth. Overall, fiscal deficit is likely to fall below interim budget targets," stated Gaura Sen Gupta, Economist at IDFC First Bank.

Echoing similar sentiments, Achala Jethmalani, Economist at RBL Bank, predicts that the government will adhere to its fiscal consolidation roadmap.

The government is considering introducing an interest subvention for its middle-class housing scheme, initially announced in the interim budget, with Housing and Urban Development Corporation (HUDCO) identified as one of the key agencies, sources informed Moneycontrol.

"Efforts are underway to transform the middle-class housing scheme into an interest subvention scheme, similar to existing provisions for low-cost housing," a source familiar with the development told Moneycontrol.

Rajesh Magow, Co-founder and Group CEO of MakeMyTrip, urges for reforms in the registration process for online travel agents (OTAs) in India. Currently, OTAs face the cumbersome task of obtaining state-wise GST registrations, which necessitates physical presence in each state, regardless of operational need. Magow proposes allowing OTAs to register centrally through their head office, a move that would reduce administrative complexities, streamline operations, and improve overall efficiency. He highlights that the current regulation puts domestic OTAs at a disadvantage compared to their international counterparts who are not bound by similar requirements.

Rajesh Magow, Co-founder and Group CEO of MakeMyTrip, proposes a uniform GST rate for hotel tariffs in Budget 2024-2025. Currently, GST rates vary based on hotel room tariffs, creating price disparities. Magow suggests a flat 12 percent GST rate across all hotel tariffs to streamline compliance and pricing consistency. For instance, currently, a room night at Rs 10,000 attracts 18 percent GST, while off-season rates at Rs 7,000 incur 12 percent GST.

In the interim Budget presented in February 2024, Union Finance Minister Nirmala Sitharaman increased the tourism sector allocation to Rs 2,449.62 crore, a 44.7% rise from the previous fiscal's revised figure.

Rajesh Magow, Co-founder and Group CEO of MakeMyTrip, emphasises the need for further support. “The Travel and Tourism industry has been growing at a healthy rate post-pandemic. The upcoming Union Budget 2024-2025 offers the Hon’ble Finance Minister an opportunity to build on this momentum. Strategic investments in this sector can unlock economic opportunities, boost employment, and enhance the competitiveness of India's tourism landscape,” he said.

Magow believes the time is right for the Finance Minister to introduce changes that incentivise the industry and sustain its growth trajectory.

Last week, Nirmala Sitharaman presided over a crucial pre-Budget consultation meet with the finance ministers of states and union territories on June 22. The meeting aimed to gather insights and recommendations for the upcoming Union Budget.

The FM assured ministers that their recommendations would be duly considered during the formulation of the Union Budget for the next fiscal year.

Union Finance Minister Nirmala Sitharaman is set to present the Union Budget for the financial year 2024-25 in the latter half of July. She will make history as the first finance minister to present seven consecutive Union Budgets, surpassing Morarji Desai, who presented six in a row.

The Budget is an estimate of the central government's revenue and expenditure for the financial year, which runs from April 1 to March 31. It is the most comprehensive account of the government's finances.

Traditionally, the Union Budget is presented on February 1. However, due to the general elections in 2024, FM Sitharaman presented an interim budget in February.

Welcome to the Moneycontrol live blog on the upcoming Union Budget 2024. Stay tuned for the latest news, key expectations, and real-time updates on the Union Budget likely to be presented by the Modi 3.0 government in the latter half of July.