Union Budget 2019-20: An Analysis

There are several welcome steps announced in the Union Budget 2019. The government’s intent to focus on infrastructure spending with emphasis on digital economy and job creation are significant announcements. The cornerstone of Budget 2019 lies in aspirations of a new India becoming a $5 trillion economy over the next few years. Key pillars on the roadmap to becoming so include ensuring an accelerated economic development and related job creation. One of key factors in achieving this goal will be developing India’s talent pool to meet requirements of various sectors. Infrastructure development across the country in road, highways, railways, port, housing, water management and tourism were called out as contributors to this vision.

The Numbers

Budget 2019-20 reflects the Government’s firm commitment to substantially boost investment in 
Agriculture, Social Sector, Education and Health. This is substantiated by increase in expenditure of  Rs 3,29,114 crores over RE (2018-19) while keeping the fiscal deficit at 3.3% of GDP.

The government is estimated to spend Rs 27,86,349 crore during 2019-20.  This is 13.4% more the revised estimate of 2018-19.  Out of the total expenditure, revenue expenditure is estimated to be Rs 24,47,780 crore (14.3% growth) and capital expenditure is estimated to be Rs 3,38,569 crore (6.9% growth). 

The government receipts (excluding borrowings) are estimated to be Rs 20,82,589 crore, an increase of 14.2% over the revised estimates of 2018-19.  The gap between these receipts and the expenditure will be plugged by borrowings, budgeted to be Rs 7,03,760 crore, an increase of 10.9% over the revised estimate of 2018-19.

The central government will transfer Rs 13,29,428 crore to states and union territories in 2019-20.  This is an increase of 6.6% over the revised estimates of 2018-19 and includes devolution of (i) Rs 8,09,133 crore to states, out of the centre’s share of taxes, and (ii) Rs 5,20,295 crore in the form of grants and loans.

Revenue deficit is targeted at 2.3% of GDP, and fiscal deficit is targeted at 3.3% of GDP in 2019-20.  The target for primary deficit (which is fiscal deficit excluding interest payments) is 0.2% of GDP.

The nominal GDP is estimated to grow at a rate of 12% in 2019-20.  The estimated nominal GDP growth rate for 2018-19 is 11.5%.

Over the past 15 years, the government has largely been able to keep the deficits below budgeted levels. In 2018-19, the government is expected to breach its budgeted target of fiscal deficit of 3.3% of GDP, as the fiscal deficit is expected to be 3.4%.  Under the FRBM Act, 2003, the three-year target (2021-22) for fiscal and revenue deficits have been set at 3% and 1.5%, respectively.

In 2018-19, the government had set a budget estimate of 3% for fiscal deficit, and 2.2% for revenue deficit. As per revised estimates, fiscal deficit has slightly exceeded the 2018-19 budget target.
 

Outstanding debt is the accumulation of borrowings over the years. A higher debt implies that the government has a higher loan repayment obligation over the years.
 

Total outstanding liabilities of the government have decreased from 5% of the GDP in 2000-01 to 48.4% in 2018-19 (revised estimates). In 2019-20, the outstanding debt is expected to be at 48% of GDP.  The FRBM Act sets a target of 40% debt to GDP to be met by 2024-25.

Subsidies

In 2019-20, the total expenditure on subsidies is estimated to increase to Rs 3,38,949 crore (13.3%) over the revised estimate of 2018-19.  This is owing to an increase in expenditure on petroleum, fertiliser, food, and other interest subsidies.  Details are given below:

• Food subsidy: Allocation for food subsidy is estimated at Rs 1,84,220 crore in 2019-20, a 7.5% increase as compared to the revised estimate of 2018-19.  In 2018-19 budget, Rs 1,69,323 crore was allocated for food subsidy, however, the revised estimate is higher than the budgeted estimate by Rs 1,975 crore.  The revised estimate for 2018-19 is 71% higher than the expenditure on food subsidy in 2017-18.
   
• Fertiliser subsidy: Expenditure on fertiliser subsidy is estimated at Rs 79,996 crore in 2019-20.  This is estimated to increase by Rs 9,910 crore (1%) over revised estimate of 2018-19.  Allocation to the subsidy in 2019-20 budget is Rs 5,010 crore higher than the allocation made in 2019-20 interim budget.
   
• Petroleum subsidy: Expenditure on petroleum subsidy is estimated to increase by Rs 12,645 crore (9%) in 2019-20.  Petroleum subsidy consists of subsidy on LPG (Rs 32,989 crore) and kerosene subsidy (Rs 4,489 crore).  The increase in allocation in 2019-20 is owing to an increase in LPG subsidy of Rs 12,706 crore (62.6%) from 2018-19 revised estimates.
   
• Other subsidies: Expenditure on other subsidies includes interest subsidies for various government schemes, subsidies for the price support scheme for agricultural produce, import of pulses, and assistance to state agencies for procurement, among others.  In 2019-20, the expenditure on these other subsidies has increased by Rs 4,251 crore (9%) over the revised estimate of 2018-19.  Table 4 provides details of subsidies in 2019-20.

Subsidies in 2019-20 (Rs crore)

Sources: Expenditure Profile, Union Budget 2019-20; PRS.

Expenditure by Ministries

The ministries with the 13 highest allocations account for 55% of the estimated total expenditure in 2019-20.  Of these, the Ministry of Defence has the highest allocation in 2019-20, at Rs 4,31,011 crore (including pensions).  It accounts for 15% of the total budgeted expenditure of the central government.  Other Ministries with high allocations include: (i) Ministry of Consumer Affairs, Food and Public Distribution, (ii) Agriculture and Farmers’ Welfare, (iii) Rural Development, (iv) Home Affairs, and (v) Human Resource Development.  Table 5 shows the expenditure on Ministries with the 13 highest allocations for 2019-20 and the changes in allocation as compared to the revised estimate of 2018-19.

Ministry-wise expenditure in 2019-20 (Rs crore)

Note:  Expenditure is net of recoveries such as fines, and ticket sales.

Expenditure on Major Schemes

 Scheme wise allocation in 2019-20 (Rs crore)

  Sources: Expenditure Profile, Union Budget 2019-20; PRS. 

• Among schemes, PM-KISAN (income support to farmers) has the highest allocation in 2019-20 of Rs 75,000 crore.
   
• The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has the second highest allocation in 2019-20 of Rs 60,000 crore. This is a decrease of Rs 1,084 crore (1.8%) from the revised estimate of 2018-19.
   
• Other schemes with high allocations for 2019-20 include National Education Mission (an increase of 19.2%), National Health Mission (an increase of 7.9%), and Integrated Child Development Services (an increase of 18.1%).
   
• Allocation to the National Rural Drinking Water Mission has increased by 81.8% over the revised estimate of 2018-19. The allocation for this year is Rs 10,001 crore, as compared to Rs 5,500 crore in 2018-19 (revised estimate). 
  Allocation to National Livelihood Mission has increased by Rs 3,481 crore (55.3%) over the revised estimates of 2018-19.
   
• Allocation to the Swachh Bharat Mission has decreased by 25.5% over the revised estimate of 2018-19. The allocation for this year is Rs 12,644 crore, as compared to Rs 16,978 crore in 2018-19 (revised estimate).  The rural and urban components of Swachh Bharat Mission have been allocated Rs 9,994 crore and Rs 2,650 crore in 2019-20, respectively.  Allocation to Swachh Bharat Mission (Rural) has decreased by 31% in 2019-20 over the revised estimate of 2018-19.

Major Legislative changes proposed in the Finance Bill

• Dispute resolution scheme:  A dispute resolution cum amnesty scheme called the Sabka Vishwas Legacy Dispute Resolution Scheme is being introduced for resolution and settlement of legacy cases pending under various Acts, including the Central Excise Tax, 1944, and the Sugar Cess Act, 1982.   
   
• Central Goods and Services Tax Act, 2017:  Under the Act, an applicant can apply for an advance ruling from an Authority constituted under various GST laws of various state or union territories.  An advance ruling can be sought to clarify certain matters, such as the determination of GST liability.  The National Authority may decide appeals against conflicting advance rulings on the same question by Authorities of two or more states or union territories.  The Bill provides for the qualification, term, and conditions of services of the National Authority. 
   
• Reserve Bank of India Act, 1934: Under the Act, RBI may set a minimum net worth requirement for NBFCs between Rs 25 lakh and two crore rupees.  The amendment allows RBI to set the minimum requirement up to Rs 100 crore. 
   
• The Act is being amended to enable the RBI to take several measures in relation to the management of NBFCs. These include:
   
• Framing schemes for resolution: The Act is being amended to allow the RBI to frame schemes for the resolution of NBFCs.  These include schemes for: (i) amalgamation of two NBFCs, (ii) reconstruction of the NBFC, or (iii) splitting the NBFC to preserve the continuity of those activities of the NBFC which are critical to the functioning of the financial system.  As a part of these schemes, the RBI may reduce the pay or cancel the shares of the senior management of the NBFC, without any compensation for the loss. 
   
• Scrutiny of group companies: The Act is being amended to enable RBI to: (i) direct the NBFC to attach to its financial statements, any information on the business of its group companies, or (ii) direct an inspection or audit of the group company.  Group companies of the NBFC will include its subsidiaries, associates, and joint venture companies.  
   
• Supersession of Board of Directors: The Act is being amended to provide for supersession of the Board of Directors of the NBFC for a period of five years.  In the interim period, the central government may appoint an administrator to carry out the functions of the Board of Directors.
   
• Removal of directors: The RBI may remove any director of a non-government NBFC and replace him with a temporary director for a period of three years.   
   
• Penalties: Penalties for certain offences has been increased.  For example, failure to furnish information under the Act is punishable with Rs 2,000.  This has been increased to Rs 1,00,000.  Further, the penalty for an auditor for failing to comply with the directions of the RBI has been increased from Rs 5,000 to Rs 10,00,000. 
   
• National Housing Bank Act, 1987:  The Act regulates the functioning of housing finance institutions through the National Housing Board.  The amendments being made include:
   
• To register as a housing finance institution, a company must have a net-owned fund of 25 lakh rupees, or higher notified amount.  This threshold is being increases to 10 crores or more.  
   
• An application for registration as a household finance institution is to be made to the National Housing Bank.  This is being amended to state that all applications will be made to the RBI.  Further, all pending applications with National Housing Board are to be transferred to RBI. 
   
• Under the Act, processes relating to registration, including consideration, grant, and cancellation of applications are to be carried out by the National Housing Board.  The Act is being amended to transfer these to the RBI.     
    
• The Act provides the National Housing Bank with various powers such as: (i) specifying the percentage of assets a housing finance institution must invest in securities in India, (ii) require housing finance institutions to maintain an account with a Scheduled Bank or the National Housing Board, and (iii) requiring them to file returns.  This is being amended to transfer these powers to the RBI.
   
• Insurance Act, 1938: The Act is being amended to require net owned funds of at least Rs 1,000 crore for registration of foreign insurers engaged in re-insurance business and operating in an International Financial Services Centre (set up in Special Economic Zones). 
   
• Securities Contract (Regulation) Act, Securities, 1956 (SCRA): The Act imposes penalties on entities who fail to furnish information required under law to a stock exchange or furnish incorrect information to the stock exchange.  These penalties range from one lakh rupees to one crore rupees.  The Act is being amended to extend the penalty for failure to furnish this information to the SEBI in addition to the stock exchange.
   
• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970: The Act nationalised banks such as the Central Bank of India, Punjab National Bank, and Corporation Bank.  Under the Act, the Board of Directors of the bank will include four whole time directors, appointed by the central government in consultation with the RBI.  The Act is being amended to increase the number of directors from four to five. 
   
• General Insurance Business (Nationalisation) Act, 1972: The Act nationalised Indian insurance companies and reorganised them into four insurance companies (excluding the General Insurance Corporation).  The Act is being amended to enable reduction in the number of such companies.
   
• Prohibition of Benami Property Transactions Act, 1988: The Act is being amended to increase penalties under the Act.  In addition to existing penalties, any person who fails to comply with summons or furnishes false information will be liable to pay Rs 25,000 for each such failure.   Further, under the Act, prior sanction is required for prosecution of certain offences under the Act from the CBDT.  The sanctioning authority has been changed to Commissioner, Director, Principle Commissioner, or Principle Director of Income Tax.
     
• Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015:The Finance Bill changes the definition of ‘assessee’ in the 2015 Act.  Currently, the Act applies to a resident of India.  The Bill amends this to make the Act applicable to both Indian residents and non-residents as defined under the Income Tax Act. 
   
• Payment and Settlement Systems Act, 2007: The Bill is being amended to prohibit any bank or payments system provider from charging customers for the use of electric modes of payment (prescribed under Income-tax Act, 1961).
   
• Prevention of Money Laundering Act, 2002: The Bill is being amended to increase the responsibilities of reporting entities (such as, banks and other financial institutions).  These entities will be additionally required to authenticate identities of their clients, the source of their funds, and the nature of relationship between the transacting parties.  Data obtained while verifying transactions must be kept for five years.  Further, the amendments seek to allow the government to notify an Inter-Ministerial Coordination Committee for inter-departmental and inter-agency co-ordination. The purpose of this committee will include the development and implementation of policies on anti-money laundering or countering the financing of terrorism.
   
• Central Road and Infrastructure Fund Act, 2000: Currently, the central government is responsible for formulating criteria on the basis of which specific projects of state roads are financed out of states’ share of funds.  The central government will now be responsible for formulating criteria for any state road projects.
   
• Securities and Exchange Board of India Act, 1992: The Act is being amended to add capital expenditure to the list of expenses incurred by the General Fund maintained by SEBI.  Additionally, the Bill amends the Act to constitute a Reserve Fund which will be credited with 25% of the annual surplus of the General Fund.  Further, the amendment adds penalties for concealment, destruction, or falsification of records, or access to unauthorised information.  The penalties may range from one lakh rupees to up to ten crore rupees or three times the amount of profits made from the act, whichever is higher. 

What does the Legal Industry say?

We reach out to the Legal industry for their comments on current budget. 

Mr. Prem Rajani, Managing Partner, Rajani Associates on the key focus areas of the Budget from a legal standpoint, such as: Investments, Real Estate – Infrastructure – Affordable Housing, Capital Markets, SMEs/MSMEs and entrepreneurs, etc.

“The Budget 2019 has touched upon almost every sector, while not disrupting the overall economic environment. It seems to provide the necessary push in-field of infrastructure, agriculture, banking and finance, technology and biggest of all housing for the common man. The government continues its initiatives towards upgrading India’s road and real infrastructure. From an industry perspective, we have seen focused efforts to support foreign investments, promotion of NBFCs and other incentives.

Sectors that will stand to gain the most under the Budget 2019 are SMEs, MSME’s, infrastructure, banking and NBFCs. 

Infrastructure: The Government has reaffirmed its commitment to set goals and schemes initiated (such as Bharatmala Pariyojana and the Sagarmala programme) by integrating state government participation to develop the road network. The boost to the sector expenditure of about Rs 100 lakh crore over the next 5 years while highlighting the need for public-private partnerships (PPP) to ensure efficient delivery of projects is heartening. The ‘One Nation, One Power’ grid in the power sector, to ensure power connectivity to states at affordable rates is promising as well. Further, by allowing Foreign Portfolio Investors (FPIs)/NRIs to subscribe to listed debt papers of REITs and InvITs, the government is definitely catalysing movement in these sectors, which hitherto have seen slow progress.

Banks & NBFCs: We will definitely see a credit boost due to the relief state-run banks would receive based on the Rs 70,000 crore capital infusion which is a healthy step.

Another major move to catalyse the currently slumped NBFC sector is the allowance of Foreign Institutional Investors (FIIs) and FPIs investment in debt securities issued by NBFCs. This will certainly positively strengthen the overall economy with additional external cash inflow and therefore enable liquidity. What will require work here is the understanding of the norms and regulations by these investors towards these financial instruments; therefore, a robust and watertight framework must be provided.

Real Estate: Developers and real estate companies focussing on affordable housing will tremendously benefit from the tax holidays offered on profits. We can continue to see more affordable housing projects crop up due to the deduction of interest on loan taken to purchase self-occupied house property which was increased from Rs. 1.5 lakh to Rs 2 lakh.

What would be interesting to see is how the Government aims to alter rental housing laws with the advent of the model tenancy law.

Capital Markets: The Budget 2019 aims to rationalize and streamlining of KYC (know your customer) norms for Foreign Portfolio Investors (FPIs) to make it investor-friendly. This along with NRI portfolio route to be merged with FPI will raise confidence among investors for seamless investment in stock markets.

Investments: The Budget greatly emphasizes on strengthening FDI in India. With the plans to liberalize FDI in aviation, media, animation and insurance intermediaries, we can expect many activities such as JVs, M&A and PE/VC investments within the sector. 

Small businesses/MSMEs: SMEs and MSMEs have been at the focal point of this Government as they propel job creation. Supporting this sector by way of the interest subvention scheme, Rs 350 crore allocation is for 2% interest subvention to all GST registered MSMEs in the current year on all fresh and incremental loans, as well as plans to open a payment portal for MSMEs. Investment in MSMEs will receive a big boost through the portal if the delays in payments to SMEs and MSMEs are eliminated.”

Nipun Bhatia, Qualified Chartered Accountant & Lawyer who is Currently working as Vice President – Strategic Management & Process Redesigning at Legal League Consulting:

“The Finance Minister presented a budget that is more forward-looking and futuristic, rather than trying to have quick-fix solutions to gain popularity. Many of the announcements may not seem to yield immediate benefits, but they’ve been announced with a long-term vision to bring positive internal changes in the economy. The vision to reach $5 Trillion economy in next few years requires announcements of initiatives that are sustainable over a period of time and not the announcements that are made with a view to gain popularity or please the general public. 

The features that stand out for me in this Budget are the steps taken to augment our stance as a ‘Digital Economy’. I believe that introduction of 2% (Two Percent) Tax Deduction at Source (TDS) on cash withdrawals exceeding Rs. 1 Crore in a year from a Bank Account will curb cash transactions and perpetuation of black money outside of the financial system. Furthermore, businesses with turnover of more than Rs. 50 Crores will have to offer digital modes of payment to their customers without any charges being passed on to such customers.  

Another important step is the reforms that are being planned to revamp tenancy laws. Every growing economy must go through this phase of metamorphosis where they shun old and archaic laws and pave way for more progressive laws. There is an alarming number of tenancy disputes that are pending in our courts, adding to the pressure of judiciary. Finance Minister’s announcement that Government will propose a model tenancy law and will circulate to states aims to positively address the relationship between landlords and tenants, hopefully making the renting process easier, transparent and healthy.”

Lastly, the announcement to set up National Sports Education Board (NSEB) to popularize sports at all levels and tap the hidden sports potential of our country is a very welcome move. I sincerely hope that this will generate more sportspersons in the country, who will highlight our name on the global landscape. The idea is not to hone and train prospective winners and medalists, but to develop true sportsman spirit in the country. NSEB and ‘Khelo India’ initiatives will spread awareness about sports within the country and make sports popular across the nation, leading to a fit and healthy nation.”

Rishi Agrawal, Co-Founder and CEO Avantis Regtech Pvt Ltd:

“The Budget puts greater spotlight on Ease of Doing Business with increased focus on digitisation. It proposes a fully automated GST refund module, an electronic invoice system and prefilling taxpayer’s returns among others.  However, it misses a great opportunity to lay the foundation for greater digitisation in Labour Compliances such as EPFO and ESI which are critical to job creation and formalisation. Income Tax and GST should serve as blueprint for straight through filings in Labour Returns, Registers & Challans. E-assessment capabilities should be extended to other departments that regulate businesses including Labour departments for higher e-governance and reduced interactions with inspectors.

The government has taken a major step forward rationalising labour laws. Four Labour Codes have been proposed instead of 44 Central Acts. This should help streamline and standardize number of registrations, returns and filings in turn reducing the cost of compliance in India. There is a need to be more ambitious and move towards a single labour code to minimise the compliance burden on MSMEs and Start ups.

A simplified single monthly return is being rolled out for GST. PAN and Aadhaar are being made interchangeable for purposes of income tax. While this simplifies compliance for individuals,  the government should move towards a Unique Enterprise Number for the corporates. Currently, a company has to register for 12-21 numbers across different government departments”

Arjit Benjamin, Practicing Advocate at Delhi High Court who is Currently working as Associate at Karanjawala & Co: 

“Being an IP Enthusiast, I’m happy to see that the Budget aims to promote the spirit of innovation and foster an environment of education, research and development. The announcements that appealed to me the most are the creation of new National Educational Policy for transforming the Indian Education System. It’s about time that the standards of our education system are enhanced to match the global benchmarks. It is interesting to note that the policy will cover both higher education and elementary education at school level. To add to this, a National Research Foundation will be established, which will further catalyze innovation in the country by funding, coordinating and promoting research. 

Further, proposal of the ‘Study in India’ scheme aims to attract foreign students to pursue higher education in India. I’m sure that this will encourage the Government to put our house in order and the Educational Institutions will raise not just the standards of course material, but also work towards improving the infrastructure. 

Lastly, the budget is ‘start-up friendly’ at various levels. The biggest announcement for the sector being that startups and investors who furnish requisite documents will not be subject to angel tax assessment. This will put end to an era of suffering by both start-ups and angel investors. All this while, start-ups were being forced to raise approximately 40% to 50% more funding, as about 30% of the funding got expended in angel tax. Further, funds raised by start-ups will not undergo any kind of scrutiny from the Income Tax Department. 

Apart from the tax benefits aimed to be extended to start-ups, there is announcement of starting TV Programmes exclusively dedicated to start-ups. This will provide a platform for start-ups to discuss relevant issues that affect the start-up ecosystem, including growth, funding and tax-planning. It is interesting to note that the programme/channel will be designed and executed also by start-ups.” 

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