On Tuesday, Finance Minister Nirmala Sitharaman created history, and not necessarily because of any of the provisions outlined in her speech.
As she rose to speak in parliament, she became the first Indian finance minister to deliver seven budget speeches in a row, surpassing former prime minister and finance minister Morarji Desai, who had delivered six.
But beyond that, the Union Budget for 2024-25 was a mixed bag. On the one hand, the government announced a flurry of schemes aimed at generating employment in the formal sector and tweaked tax rates to reduce the burden on the salaried. On the other hand, it removed indexation benefits on several asset classes, a move that could see a significantly high tax mop-up, going forward, but one that might also have a negative impact on sectors such as real estate.
Sitharaman listed nine priorities for this year’s budget and for the coming years. These include productivity and resilience in agriculture, employment and skilling, inclusive human resource development and social justice, manufacturing and services, urban development, energy security, infrastructure, innovation and research and development; and next generation reforms. She said that the budget focusses on job creation and boosting consumption, potentially benefiting consumer goods, real estate, and auto sectors.
Infrastructure
Sitharaman said the government will continue its focus on building infrastructure and will maintain long-term infrastructure spending at Rs 11.11 trillion. In addition, it will offer Rs 1.5 trillion to states as soft loans, to fund infrastructure projects.
Fiscal deficit
But even as it does that, the finance minister said that, in 2024-25, her government plans to reduce the fiscal deficit to 4.9% of gross domestic product, lower than the 5.1% it had projected in the interim budget in February.
Employment
The finance minister proposed government spending in excess of Rs 2 trillion ($24 billion) towards efforts aimed at creating jobs over the next five years. To do so, it will incentivize companies including those in the manufacturing sector to offer internships and employment to people. Apart from this, the government will focus on skill development programmes and provide loan subsidies for higher education, the finance minister said.
The focus on jobs is critical, as unemployment was one of the biggest agendas highlighted by the opposition parties in the just concluded general elections. According to the Centre for Monitoring Indian Economy, the unemployment rate in the country is 8.4% although the official government data puts the figure at a lower 6.7%.
Sitharaman's announcement comes after the relatively poor showing of the Bhartiya Janata Party (BJP) in the polls, in which it lost its majority and had to settle for a coalition government with more than half a dozen regional allies propping it up.
The elections resulted in the BJP’s tally declining from a historic high of 303 seats in the Lok Sabha in 2019 to just 240 seats. Analysts say rural distress and a weak job market were to blame for voters rejecting the ruling party across large parts of Uttar Pradesh, Rajasthan, Maharashtra and Karnataka, where it has had a strong showing in the last couple of decades.
Rural development
And so, apart from jobs in the formal sector, the finance minister also focused on the rural sector. She said that her government will spend Rs 2.66 trillion ($32 billion) on rural development schemes.
As she did that, she also announced special packages for Bihar and Andhra Pradesh, in an ostensible bid to placate the BJP’s two principal allies--the Nitish Kumar-led Janata Dal (United) and the N. Chandrababu Naidu-led Telugu Desam Party--both of whom are critical for the survival of the Narendra Modi government. The finance minister said that her government will expedite multilateral loans to the two states, so as to build large-scale infrastructure projects.
Taxation
All of this notwithstanding, what this budget will perhaps be remembered for the most is its accent on taxation.
The government tweaked the personal income tax slabs in the new tax regime and raised the standard deduction for salaried employees from Rs 50,000 to Rs 75,000, in a bid to assuage the middle classes, which are considered among the BJP’s core voter base.
It also raised the Securities Transaction Tax (STT) on derivatives trading, changed short-term and long-term capital gains taxes, and abolished the angel tax on startups.
The finance minister also announced a comprehensive review of the Income Tax Act of 1961, an exercise, she said, will be completed in six months.
Sitharaman said the government had tried to simplify the capital gains tax structure. She increased the tax rate on long-term capital gains to 12.5% from 10% and set the exemption limit at Rs 1.25 lakh a year. The tax rate on short-term gains from certain financial assets will increase from 15% to 20%. Also, unlisted bonds and debentures were brought under the ambit of capital gains.
The STT rate was hiked, too, increasing the burden of traders involved in the futures and options segment after a boom in derivatives trading over the past few years raised regulatory concerns.
But the devil perhaps lay in the detail, as the benefit of indexation was taken away on sale of property, effectively implying that individuals selling their property will no longer be able to adjust the purchase price using inflation, thereby bringing down their capital gains.
Before the budget, sale of property was subject to a 20% long-term capital gains tax, with indexation benefit. This adjusted the purchase price for inflation, effectively bringing down the taxable capital gain. The budget has removed the indexation benefit but reduced the tax rate to 12.5%. The move results in an increased tax liability for people looking to sell their property.
"We wanted to simplify the approach to taxation... the average taxation has actually come down when we say it is 12.5%," Sitharaman said.
The finance minister also announced that the buyback of shares will be considered an income for the beneficiary shareholders.Moreover, just like in the case of real estate, shareholders will now have to pay capital gains on the buyback without the benefit of indexation. "For reasons of equity, I propose to tax income received on the buyback of shares in the hands of the recipient," Sitharaman said in her budget speech.