Union Budget 2023: Will The Government Strike A Balance Between Welfare Spending And Tax Augmentation

Following the spirit of previous Budgets, Finance Minister Nirmala Sitharaman has hinted that the primary goal of Union Budget 2023 would be to stimulate economic growth via higher government expenditure, ruling out any dole-outs, which is typically a trend in the Budget before national elections. Nonetheless, the forthcoming Budget is much awaited due to a host of other external factors, including the ongoing conflict between Ukraine and Russia, India's accession to the G20 presidency, and the impending global economic downturn. The finance minister is clearly faced with the most significant challenges and pressing task of striking a balance between different stakeholder expectations and fiscal prudence. It is unlikely that the finance minister will pause on deficit correction, given the momentum on overall direct and indirect tax collections. 

2022 was an eventful year in the nation’s bid towards becoming an economic superpower and saw India surpassing the United Kingdom's GDP. I expect that an outward external approach would mean relaxation and reforms to attract foreign investors, including simplifying a complex capital gains tax structure and varying tax rates, coupled with a threshold for characterising long and short-term gains and a complex web of rates for investor class of taxpayers. It is anticipated that the Budget proposals will attempt to simplify this perplexing system by bringing uniformity on different asset classes or holding periods, including ironing out issues for pass-through investors. Further, to propel the start-up ecosystem, Budget proposals may consider granting exemption to start-up investors on the realisation of capital gains where shares are listed on the stock exchanges, irrespective of the holding period. 

The digital economy will continue to augment a good chunk of India’s vision to become a USD 5 trillion economy. In pursuance thereto, launching India’s first e-Rupee (Central Bank Digital Currency) and Open Network for Digital Commerce (ONDC) is the first step. Budget 2023 is expected to iron out wrinkles that pose hurdles in India’s aim to be a trillion-dollar digital economy. This means we will see steps to ease its stance on trading in blockchain-based currencies/assets. Admittedly, a global collapse of crypto has not dampened the spirits of the Indian crypto trading community. However, a drastic drop in the trading of Virtual Digital Assets (VDAs) on all centralised VDA exchanges and the resultant loss of local exchange trade volume have the potential to discourage such investments. VDA investors expect a set-off of trading losses, a benefit which is presently denied. An expectation of a slash in withholding rate will be courageous given India’s staunch opposition towards this segment. 

At a policy level, perhaps buoyed by record tax collections, there are enough indicators to eliminate all forms of tax exemptions. However, a drastic policy moves while the remnants of Covid-19 are visible, particularly for small and medium enterprises, begs the question of whether or not India is ready for such changes, given that the concessional tax rate in case of new domestic manufacturing companies has March 31, 2024, as the sunset.

On the personal tax front, 2014 was the last time when the tax slabs were rejigged, and besides the inflation trigger, small and marginal taxpayers hope for revision of tax slabs. On the other hand, corporates anticipate simplification of tax structure and rationalisation of measures, if not modifications, particularly for non-manufacturing businesses, which are taxed high. However, there is limited rationale for such discrimination. Further, multinationals expect the Budget to develop a framework on how India plans to implement OECD’s ‘Pillar-2’ approach, bringing India to a multilateral forum. Yet, with limited policy guidance, the Budget is expected to streamline domestic regulations and signal a roadmap. It also may choose to address concerns by lending clarifications on the unilateral Equalisation Levy (EL) and the Significant Economic Presence (SEP).

On the indirect-tax front, the Budget is expected to continue to bolster its Make-in-India push through changes in the customs tariff structure to stimulate domestic manufacturing and discourage non-residential imports. This may well include a hike in customs duty rates on commodities and reducing the rates on raw materials to further bolster the domestic manufacturing. In addition, having tasted success, the Production Linked Incentive (PLI) Scheme may witness an increase in the outlay and consider eligibility for other sectors such as toys, chemicals and shipping containers.  

Budget 2023 will lay down a growth-oriented roadmap in times when global economies reel from a worldwide recession. India’s tax policy achievements in the past two years, given its active role in BEPS Action Plans, embracing multilateral MLI, the introduction of faceless schemes, etc., are vital steps that have attracted global investors' attention. The administrative framework, though, has not kept pace with bold policy moves. Hence, the focus on administrative reforms, particularly on GST enforcement and ironing out aspects that continue to worry foreign investors, shall continue. While all stakeholders will welcome a reduction in tax rates, they are unlikely to happen given the fiscal desire to build a ‘war chest’ to face external factors and deliver an ambitious growth target. Like in all Budgets, a daunting task of steering the nation awaits FM Sitharaman.