Union Budget 2021: Expectations versus Reality

It’s time to weigh the Budget 2021 outcome against the expectations of the consumers and businesses. India’s long-awaited annual budget comes amid colossal hopes in a year when the nation faces its worst recession. The country’s GDP contracted due to COVID-19 while unemployment has soared, leaving the banking sector’s crisis alone. 

FM Nirmala Sitharaman stated that the budget focuses on spending more to push growth. Increased outlays in critical sectors, such as healthcare and infrastructure, were announced to encourage more economic activity. An important aspect to note here is the choice made by the government to raise funds. It has decided to keep the direct tax rates unchanged while going for divestment in two PSU banks as non-tax revenue means to address India’s worsened fiscal deficit situation.

Taking a closer look at personal taxation, many considered that the Union Budget 2021 had fewer impactful announcements than the last time. Starting from a much-hyped expectation, many speculated the levy of COVID cess on high-income earners. This was not announced at the Budget 2021 relieving the income tax assessees from any additional tax expense. There was an expectation from a few corners that the tax slabs/rates and rebates under Section 87 of the Income Tax Act may be revisited. However, no changes were made to the current slabs/rates or rebate.

As expected, the exemption of cash allowance instead of Leave Travel Concession (LTC) for purchase of goods and services will be available for assessment year ending 31st March 2022. Meeting the many expectations, the time limit to sanction affordable housing loans for claiming additional deduction of interest under Section 80EEA gets further extended up to 31st March 2022. However, the government has not proposed any higher deduction under Sections 80DDB and 80D, whether as an additional medical expenditure or insurance premium paid on any top-up health insurance policy against COVID-19, unlike the expectations. 

Neither was any deduction announced for work from home expenses nor was the standard deduction limits changed. Also, the limits under section 80C and Section 24(b) were left unchanged. Amid various speculations, there were otherwise no relaxations in residential status granted for those persons who were stranded in India due to COVID. However, the relief from filing ITR for senior citizens, subject to conditions, came in as a surprise. Likewise, income tax will be imposed on the proceeds of high-premium Unit Linked Insurance Plans (ULIP) and interest on PF employee contributions each above Rs.2.5 lakh. 

On the other hand, the businesses and professionals had very little to rejoice. The income tax audit limits were increased only for those businesses who carry out more than 95% of transactions digitally, unlike every business. Further, various provisions were amended to bring clarity in its applicability and scope. One of them was a much-litigated matter that if there is a late deposit of an employee’s contribution to the provident fund beyond 31st March of FY, it cannot be considered under section 43B of the Income Tax Act.

Moreover, the relief under Section 80-IAC for eligible startups was relaxed by extending the time limit for incorporation up to 1st April 2022. Further, time to transfer residential property was extended by one year while investing proceeds to obtain an exemption from the long term capital gains. Both the above proposals were in tandem with the sectoral expectations.  

In the next, a lot of expectations were for tax concessions for stock market investors and mutual fund investors. These had ranged from the reduction of holding period for long term capital gains to increasing the threshold from Rs 1,00,000 for not attracting long term capital gains tax under Section 112A of Income Tax Act in case of sale of equity shares. However, in a surprising move, the proceeds from the redemption of ULIP earlier exempt under Section 10(10D) were removed. The premium paid has exceeded Rs.2,50,000. It will henceforth be considered as deemed capital gains under Section 45(IB). 

Many were also betting on abolishing taxes on dividends for retail investors in equity markets. Unlike their expectation, the government streamlined the taxation of dividend in the hands of investors. The advance tax that earlier applied on dividends in the investors’ hands is now made applicable only when the company declares it. On the other hand, a new zero-coupon bond will be issued by the infrastructure debt fund to be notified by the government later.

Coming to Goods and Services Tax (GST), several industry players wanted the government to consider rate cuts and rationalise various items. However, the matter will only be taken up at the GST Council in the coming months and not tabled for the Budget 2021 session. A clarity was expected around the implementation of e-invoicing for the rest of the taxpayers.

However, no announcement was made in this regard. Several taxpayers and tax professionals wanted the government to reintroduce GSTR-2. At the same time, also provide for the revision of the GST return once filed. None of their demands was considered at the Union Budget 2021. Instead, the GST audit was surprisingly removed altogether from the CGST Act.

It was not having the expected impact on revenues. Further, another condition was added in Section 16 of the CGST Act to plug inconsistencies between GSTR-2A/2B with GSTR-3B in case of Input Tax Credit (ITC) claims while addressing specific procedural gaps in both CGST and IGST Acts. Not to forget, several customs law provisions were revised to provide a leeway for domestic players to produce more locally. 

All-in-all the Union Budget 2021 was a ‘no harm’ one, as our finance minister kept direct tax rates unchanged not to overburden people and put the much-needed focus on the health infra sectors.

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in