By Pratik Shah and Keyur Shah
The FY24-25 Union Budget presented by the Indian Finance Minister is a strategic blueprint aimed at catalyzing the nation's journey towards 'Viksit Bharat' or Developed India. The focus on creating large-scale employment opportunities, accelerating the growth of the rural economy, and fostering a consumption-driven economy through these means is noteworthy. With a clear impetus on MSME, employment growth, skilling and the middle class, a slew of incentives have been announced in this context.
The introduction of a credit guarantee scheme for MSMEs and the establishment of a self-financing guarantee fund with a guarantee cover of up to Rs 100 crore per applicant is a significant step. This move will likely reduce the credit risk for lenders and encourage them to extend more loans to MSMEs. This should result in significant credit offtake in the financial sector as well as provide impetus to the micro lending and non-bank lending to the MSME sector. By mitigating the risk factor, banks and financial institutions may be more inclined to support small businesses, which are often considered the backbone of the Indian economy. Further, given the specific announcement regarding strengthening debt recovery tribunals and also setting up of more such tribunals should help foster a better credit environment.
Secondly, the proposal to lower the turnover threshold for mandatory onboarding on the TReDS platform from Rs 500 crore to Rs 250 crore is a strategic move to enhance liquidity for MSMEs. By converting trade receivables into cash, MSMEs can unlock their working capital more efficiently. This initiative not only improves the cash flow for small businesses but also encourages Public Sector Banks (PSBs) to engage with digital platforms, aligning with the Viksit Bharat vision of digital empowerment and financial inclusion.
From a direct tax perspective, the FM said that the government would revamp the income tax, 1961. Hence one can expect a leaner and easier direct tax legislation in the near future. Further, for the financial services industry, the removal of the angel tax and the rationalization of tax rates for foreign banks from 40 to 35 percent should be of benefit. The reduced limit for reopening of assessments from 10 years to 5 years should also go a long way in providing certainty to taxpayers.
The rationalization of the capital gains tax regime is a big move. The budget proposes an increase of the long-term capital gains tax rate from 10 percent to 12.5 percent and short term capital gains tax (on listed securities other than derivatives) from 15 percent to 20 percent. The change in the long term capital gains tax rate is a bit of a mixed bag. There were certain gains (like on the sale of unlisted securities, real estate etc.) which were taxed at 20 percent, these will not be taxed at 12.5 percent and hence this will result in a lower rate of tax for these transactions. However, in context, certain long term assets like real estate and unlisted shares etc, one did also get indexation benefit, which now is proposed to be removed. This could be of significant impact for the sellers.
Some of the other changes like the abolition of the buyback tax and the resulting taxation of the same as dividends should also have some impact on buy back transactions. Similarly, the increase in the securities transaction tax rates may cool down the futures and option markets which were on fire.
Last but not the least, the budget's emphasis on agricultural reforms is likely to have a far-reaching impact on the rural economy. With the rural demand expected to pick up, there will be a positive impact on consumption in the rural sector. The banking sector must also be prepared to support this growth through innovative financial products and services that cater to the evolving needs of both the rural and urban populations.
All in all, one does feel that the Union Budget for FY24-25 is forward looking and does have its heart in the right place. It lays down a comprehensive framework for fostering economic growth, with a clear focus on inclusivity and sustainability. The initiatives announced are likely to stimulate the MSME sector, enhance rural development, and create a conducive environment for job creation and skill development. If implemented effectively, these measures can significantly contribute to the realization of the Viksit Bharat agenda, paving the way for India to emerge as a developed and self-reliant economy.
Pratik Shah, National Leader - Financial Services, EY India.
Keyur Shah, Financial Services Tax Leader, EY India.
Views are personal and do not represent the stand of this publication.
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