Budget 2024: Focus needs to be on tax reforms and sectoral boosts

As India gears up for Budget 2024, there are high expectations across various sectors and stakeholders. The upcoming budget promises significant reforms aimed at strengthening economic growth, fostering investment, and promoting sustainable development. Key areas of focus include taxation reforms, incentives for green technologies, expansion of Production Linked Incentive (PLI) schemes, and substantial investments across various sectors. This report delves into the anticipated measures and their potential impact on India's economic landscape, highlighting critical reforms in both direct and indirect taxation, initiatives to support the green economy, and strategic budgetary allocations for key sectors.

Taxation Reforms in Budget 2024: Enhancing Efficiency and Relief

Indirect Tax Reforms

The budget may propose bringing petroleum products under the GST regime. It might also review customs duty rates to encourage domestic manufacturing by reducing duties on raw materials and increasing them on finished goods.

Direct Tax Reforms

The upcoming budget is considering reforms in personal income tax to provide more relief to the middle class, including a potential increase in the current basic exemption limit of ₹2.5 lakh. Furthermore, there could be enhancements in deductions and exemptions.

The Minimum Alternate Tax (MAT) rate, applicable to companies with low taxable income, may also be reduced to lessen their overall tax burden. There are discussions about reviewing the taxation of dividend income to establish a more favourable regime for individual shareholders. The budget may explore further tax reliefs and exemptions for startups to support entrepreneurship and job creation.

Wealth Tax Reintroduction

· There are signs suggesting that the government may reintroduce the wealth tax, previously abolished in 2015.

· This tax is expected to focus on individuals with high net worth, possessing assets above specified thresholds like ₹5 crore or ₹10 crore, and could entail a tax rate ranging from 1% to 2% on the individual's net wealth.

· The objective behind this measure is to expand the tax base and tackle wealth inequality within the country.

Changes in Capital Gains Taxation:

· The government is considering extending the minimum holding period for long-term capital gains tax on listed equity shares from the current 1 year to either 2 or 3 years. This adjustment aims to discourage short-term speculative trading and encourage longer-term investment in the stock market.

· Additionally, there is a proposal to replace the current tiered structure of long-term capital gains tax on listed securities with a flat tax rate ranging from 10% to 15%.

· For unlisted shares and real estate, the government may also extend the holding period for long-term capital gains tax from 2 years to either 3 or 5 years. These potential changes are intended to promote stability in financial markets and incentivize long-term investment over quick profit-taking strategies.

· Increase in Securities Transaction Tax (STT) on High-Frequency Traders and Algo-Based Hedge Funds is also expected.

Green Economy

The budget may incentivize sustainability by offering tax benefits like deductions or accelerated depreciation for companies investing in renewable energy, electric vehicles, and other green technologies. Additionally, there could be initiatives such as introducing a carbon tax or emissions trading scheme to discourage polluting activities and promote sustainable development. Furthermore, significant investments, possibly up to ₹1.5 trillion, are anticipated in solar, wind, and green hydrogen projects, aiming to support India's goal of achieving 500 GW of non-fossil fuel-based energy capacity by 2030.

Production Linked Incentive Schemes

There is a pressing need to expand the Production Linked Incentive (PLI) scheme into additional sectors. These sectors could encompass toys, textiles apparel, wood-based industries, tourism, logistics, small retail, and media & entertainment.

Sectors that could see new or expanded PLI schemes in the 2024 budget include:

· Battery cell chemistry to support domestic production of electric vehicles (EVs),

· Renewable energy devices, such windmills and solar panels. There will likely be

increased focus on renewable energy to achieve the ambitious goal of sourcing 50% of India's electricity needs from renewable sources by 2030.

· Technical textiles and apparels aimed at boosting exports.

· Agricultural products and processed foods.

These efforts aim to stimulate investment, production, and export capabilities in strategic sectors, fostering economic growth and self-reliance. The government will likely allocate significant budgetary resources to fund the expansion and continuation of the PLI schemes, given their importance in driving domestic manufacturing competitiveness.

Budgetary Implications for Key Sectors

· Infrastructure

The budget is expected that the budget would continue to place a high priority on the construction of infrastructure, especially roads, highways, and tunnels. A projected compound annual growth rate (CAGR) of 11.4% in capital expenditure from 2021 to 2026 underscores the government's commitment to enhancing transportation networks and connectivity.

· Railways

Over the next five years, Capital expenditure in the railways sector is expected to increase by 76%. In order to increase capacity and efficiency, plans call for enhancing port connectivity, giving priority to tracks intended for the movement of coal and minerals, and tackling traffic problems.

· Defense

There is a potential for accelerated defense capital expenditure with a particular emphasis on indigenisation, domestic sourcing and absorption of the latest technology from the West giving fillip to the homegrown defense companies.

· FMCG & Auto

Measures geared towards boosting consumer spending power, especially in rural areas, are poised to stimulate demand for fast-moving consumer goods (FMCG), two-wheelers, and tractors. Such initiatives are expected to bolster economic activity and support growth in these sectors.

· Public Sector Undertakings (PSUs)

The budget may announce initiatives such as privatization or stake sales of public sector enterprises, aiming to enhance efficiency, competitiveness, and resource allocation within these entities.

GIFT City: Attracting Startups Back to India with the “Ghar Wapsi” Scheme

The Indian government is reportedly planning to introduce measures in the upcoming Union Budget to encourage Indian startups currently based abroad to return to the country, a trend being referred to as the “Ghar Wapsi” or reverse flip. A key strategy involves leveraging GIFT City  (Gujarat International Finance Tec-City) as a favorable hub, with the provision of tax breaks and other incentives aimed at driving this homecoming. Efforts will also be made to better integrate GIFT City with India's mainstream stock exchanges, providing returning startups easy access to the country growing domestic capital pool and investor base. GIFT City's existing advantages, such as its special economic zone status and recent regulatory changes enabling direct listings, are expected to foster a familiar and supportive ecosystem to lure back Indian startups and further strengthen India's position as a global tech leader.

Budget 2024 is poised to be a transformative financial plan, with reforms that could reshape India's economic and investment landscape. By addressing taxation, promoting sustainability, expanding the PLI schemes, and making strategic investments across various sectors, the government aims to drive economic growth and self-reliance. The proposed measures are not just about immediate fiscal adjustments but are designed to lay the foundation for long-term stability and prosperity. As these initiatives unfold, they are expected to stimulate investment, enhance competitiveness, and create a more inclusive and sustainable economy, positioning India for robust growth in the years to come.

The author, Mr. Adarsh Agarwal, Senior Research Analyst at Pace 360

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