News

Published: June 10, 2024
Updated: June 10, 2024

Finance Minister Faces Daunting Task of Presenting Comprehensive Budget Amid Pending Reforms

Immediate Budget Challenges

Under the new coalition government, the finance ministry's first significant challenge will be to present a comprehensive Budget for the fiscal year 2024-25 within the next month. While preliminary work on the Budget has begun, industry consultations are expected to follow soon. The focus will be on whether the government will adhere to the fiscal-deficit target of 5.1% of GDP, as outlined in the Interim Budget in February, or pursue more aggressive fiscal consolidation, bolstered by a record ₹2.1 trillion dividend from the Reserve Bank of India. The path taken will be closely monitored by S&P Global Ratings, which may consider a ratings upgrade if fiscal discipline is maintained.

Addressing Tax Controversies:

The finance ministry will need to address the controversy arising from the amendment to the Income Tax Act in the FY24 Budget. This amendment mandates that large companies must pay micro, small, or medium enterprises (MSMEs) within 45 days under written agreements from April 1, 2024, or face the disallowance of these expenses from their taxable income. This change has raised concerns among traders and certain MSMEs, who fear it might drive business away from registered MSMEs to unregistered ones. Finance Minister Nirmala Sitharaman has indicated a willingness to reconsider this issue and has encouraged MSMEs to present their cases before the Budget.

Strategic Privatization Initiatives:

Another priority for the finance ministry will be to expedite the long-pending strategic sales of IDBI Bank, Shipping Corporation of India, and NMDC, whose privatizations are in various stages. Additionally, the ministry aims to accelerate secondary market offers of different public-sector enterprises, taking advantage of favorable valuations to maintain overall fiscal balance. However, new privatization or divestment plans for central public sector enterprises (CPSEs) and public-sector banks (PSBs) might be deferred, given the need for broad consensus among coalition partners.

GST Rate Rationalization:

Efforts to rationalize goods and services tax (GST) rates will require careful deliberation by the GST Council. The council may need to reconstitute a state panel to review the matter, potentially including members from allied parties. Discussions may also revisit the issue of compensation cess to states and the inclusion of petroleum products within the GST framework.

Direct Tax Code and Other Tax Reforms:

The finance ministry may prioritize the long-delayed implementation of the Direct Tax Code (DTC). A task force submitted a draft report in 2019, with some recommendations already independently adopted. The new government may review the code afresh, considering emerging tax issues, particularly in the digital sector. Additional tax reforms on the agenda include revamping capital gains tax, reworking penalty-related legislation, and standardizing the taxation of all asset classes.

Insurance Law Amendments:

Amendments to the insurance law, including proposals for composite licenses, remain pending and may require significant political consensus within the coalition. These changes aim to modernize and streamline the insurance sector, potentially boosting industry efficiency and growth.

Key Priorities

● Fiscal Discipline: Maintain the fiscal glide path to achieve a fiscal deficit target of 4.5% of GDP by FY26.
● Privatization Efforts: Expedite the strategic sale of IDBI Bank, Shipping Corporation, and NMDC.
● MSME Tax Resolution: Address the tax controversy related to MSME payment deadlines.
● Direct Tax Code: Implement the long-delayed Direct Tax Code to modernize tax administration.

The finance ministry faces a substantial workload as it prepares the 2024-25 Budget and addresses various pending reforms. Balancing fiscal discipline with strategic economic initiatives will be crucial for the new government, ensuring sustainable growth and stability in the Indian economy.