Mains Marathon 2024

Approach Begin with a brief overview of the Union Budget 2024-25 Mention the recent economic reforms outlined in the Union Budget 2024-25 Highlight the implications of recent changes on India’s financial landscape. Conclude Suitably

Introduction

In the Union Budget 2024-25, there have been several changes related to the angel tax, equalisation levy on e-commerce, application of capital gains and Securities Transaction Tax (STT) and several new initiatives related to the MSME sector.

Body

Key Changes in the Budget Regarding Industry :

• Angel Tax: The government in the Union budget 2024-25 has announced the abolition of the angel tax.
  • Angel tax is the tax that must be paid on the funds raised by unlisted companies through the issuance of shares in off-market transactions if they exceed the fair market value of the company.
• Equalisation Levy: The government has decided to withdraw the 2% equalisation levy on the e-commerce supply of goods and services.
  • However, the 6% equalisation levy under the Finance Act 2016 for specified digital services, such as online advertising, will remain in effect.
  • The levy affected major US digital companies, leading Washington to propose retaliatory import tariffs of up to 25% on several Indian products to offset approximately USD 55 million in taxes.
• Increased Taxation on Capital Gains :
  • The Budget 2024 has revised the rules for determining long-term capital gains, changing the holding periods for various types of capital assets that qualify for short-term or long-term capital gains.
  • There will now be only two holding periods: 12 months for the Short-term and 24 months for the long-term to determine whether capital gains from assets are short-term or long-term.
  • The exemption limit for capital gains on listed equity and equity-oriented mutual funds has been increased to Rs 1.25 lakh per annum from Rs 1 lakh.
  • Short-term capital gains from all assets, except listed equity shares and equity mutual funds, will be taxed according to the investor's tax slab rates.
    • The short-term capital gains tax rate for equity shares and equity mutual funds has been increased to 20%, regardless of the tax slab.
• Increased Securities Transaction Tax (STT): For futures, the STT is increased to 0.02%, and for options, it is increased to 0.1%.
  • Options and futures are two types of derivatives contracts that derive their value from market movements for the underlying index, security, or commodity.
• New Assessment Model and Credit Schemes for MSMEs:
  • New Credit Assessment Model for MSME:
    • Public Sector Banks (PSBs) are required to assess MSME credit eligibility based on digital footprints rather than traditional criteria like assets or turnover.
    • It will also cover MSMEs that do not have a formal accounting system.
  • Increase in Mudra Loan Limit:
    • The Mudra loan limit has been raised from Rs 10 lakh to Rs 20 lakh, and entrepreneurs who have successfully repaid previous 'Tarun' category loans are eligible for the increased limit.
  • Mandatory Onboarding on the TReDS Platform:
    • The turnover threshold for mandatory onboarding on the Trade Receivables Discounting System (TReDS) platform has been reduced from Rs 500 crore to Rs 250 crore.
    • This move will bring 22 more Central Public Sector Enterprises (CPSEs) and 7,000 additional companies onto the platform, enhancing liquidity and working capital access for MSMEs.
  • Expansion of SIDBI Branches:
    • The Small Industries Development Bank of India (SIDBI) will open new branches in major MSME clusters, with 24 branches to be added this year and a target of covering 168 out of 242 clusters within three years.

Implications of the Recent Changes:

• Angel tax:
  • The scrapping of angel tax would help bolster the Indian start-up ecosystem, boost the entrepreneurial spirit, and support innovation.
  • The abolition of the angel tax is expected to attract more foreign investors and provide essential capital for start-ups, especially amid the significant decline in start-up funding.
    • According to the Indian Tech Startup Funding Report 2023 by Inc42, start-up funding fell by 60% in 2023 to USD 10 billion.
• Equalisation levy:
  • The withdrawal of the 2% levy is expected to reduce compliance burdens and create a mutually conducive environment for non-resident digital companies operating in other jurisdictions.
  • This move is likely to ease trade tensions between India and the US, fostering a more collaborative international trade environment.
  • The decision underscores India’s commitment to aligning with global taxation norms and practices, facilitating a smoother transition to the OECD/G20’s Pillar 1 solution.
• Increase in STT:
  • It could lead to reduced speculative trading, thereby cooling down market activity.
    • The increase in STT aims to curb the exponential rise in volumes in the F&O segment, which the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have flagged as a potential risk to macroeconomic stability.
    • High volumes in derivatives can pose systemic risks and affect capital formation, investment, and economic growth.
  • The new tax rates are likely to increase compliance costs for traders and investors while generating additional revenue for the government.
• MSMEs:
  • The shift to a digital footprint-based assessment model will facilitate easier credit access for MSMEs, especially those without formal accounting systems.
  • The increased Mudra loan limit and the introduction of a collateral-free credit guarantee scheme will enhance financial support for MSMEs, enabling them to upgrade technology, invest in new machinery, and improve competitiveness.
  • Lowering the threshold for mandatory onboarding on the TReDS platform will improve liquidity for smaller enterprises by allowing them to convert trade receivables into cash more efficiently.
  • Expanding SIDBI branches will ensure that MSMEs in major clusters have better access to financial services, facilitating their growth and development.

Criticism:

• High Deficit and Debt Levels: Critics have raised concerns that these reforms could exacerbate national debt and fiscal deficits, potentially jeopardizing economic stability.
• Tax Policy Issues: Some believe the proposed tax reforms disproportionately benefit the wealthy or corporations, exacerbating income inequality.
• Concerns Over Prioritization: Some critics question the prioritization of specific reforms over others, arguing that critical issues like healthcare, education, and job creation may not receive adequate focus, potentially neglecting the long-term needs of the population.
• Limited Engagement with Stakeholders: Critics point out that there may have been insufficient consultation with various stakeholders, including civil society, industry representatives, and local communities, leading to potential gaps in the budget’s responsiveness to actual needs.

Conclusion

The recent economic reforms outlined in the Union Budget 2024-25 are poised to significantly enhance India's financial landscape. These measures demonstrate a commitment to fostering a more dynamic and inclusive economy by streamlining credit access for MSMEs, aligning tax policies with global standards, and mitigating risks in the financial markets.