What we should expect from Budget 2021?

The Union Budget 2021 is just quadruple days away. Amid concerns over the severe impact of Coronavirus on India’s GDP growth during the past year, Finance Minister Nirmala Sitharaman will present her third Union Budget on 1 February, 2020.

All eyes are set on the Budget 2021-22 now. Defence continues to be a priority area given the precarious situation at our Northern frontiers. In addition, the defence budget could be the government’s tool to promote in-country manufacturing, jobs and exports to help the ailing economy.

Over the decades, successive finance ministers have routinely promised that there will be no shortage of funds for the armed forces, but the reality remains otherwise. The military’s financial demands come at a time when India in deep recession following the serious financial downturn due to the COVID-19 pandemic. Though some green shoots are visible in the economy, these are unlikely to shore up government revenues in the coming fiscal in any substantial measure. Besides, to revive the economy, funds will need to be invested across several sectors from manufacturing to infrastructure, placing the government in a quandary over where it can possibly source funds to adequately finance the military.

Among other things, it is most likely that one of the Budget’s key spending areas will be to strengthen the Centre’s Atmanirbhar Bharat pledge. Defence Minister Rajnath Singh announced last year that the country would put an embargo on import of 101 items over the next four years in an effort to spawn indigenous manufacturing of military hardware. Singh later went on to say that a country that depends on imports for its military equipment can never be strong and asserted that being self-sufficient in the defence sector is linked to “self-respect” and “sovereignty”.

Following two successive quarters of GDP contraction, India’s growth could be in the positive zone for the remaining fiscal, even though overall GDP is likely to contract by 7.7% in 2020-21 compared to 4.2% growth in the previous year. The vaccine rollout has also given hope that economic activity will resume normalcy soon. The government has made its policy of ‘low tax rates – no incentives’ abundantly clear. However, some areas deserve special attention in the current fragile environment.

Tax benefits/incentives such as a tax holiday could give the sector the same incubation period to attract large scale investment and growth as was once provided to infrastructure and telecom sector etc. But some of the ideas, like lowering the TDS exemption threshold on interest income to prevent tax avoidance, may not exactly please taxpayers. Even so, we hope that some of these suggestions will find their way into the Finance Bill 2021. Some of them are:

  • Give indexation benefit to equity funds
  • Extend NPS taxsaver option to general investors
  • Remove tax on dividends
  • Clarify tax rules for futures and options
  • Offer exemption to tax-free portion put in annuity
  • Tax benefits for vehicle purchases
  • Separate deduction for pension plans in line with NPS
  • Remove restriction on setting off home loan interest
  • Deduction of expenses on maintenance of self-occupied house
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