The Finance Budget of 2022 is expected to go live on February 1, 2022. While the D-street is looking forward to the budget session, it is going to be quite a task for the Finance Ministry as the goal of becoming a $5-trillion economy by 2025 presents several challenges. With the risk on Covid-19 cases again, the official third wave has begun and the risk of another supply disruption looms large.
While the private sector’s capacity utilization rate remained low at around 70 percent in Q4, the government’s spending on infrastructure and other public works should help boost consumption and keep the economy on track. The government needs to increase funds through various means, including foreign direct investment and asset monetization, to cover its fiscal deficit.
Having said that, here are the six key expectations coming from the industry experts.
Waving off Commodity Transaction Tax (CTT)
Indian markets have the advantage of population and it has a larger potential than we ought to think it has. India’s physical gold and other commodities markets have the potential to become price makers instead of takers. Since the implementation of CTT, many traders have shifted their base to Dubai and other locations, diminishing the commodity market potential.
Off late, many financial instruments were introduced and an International Bullion Exchange was set up. With the increasing options contracts, warehousing facilities, and delivery centers, waiving CTT will encourage more participation and volumes in Indian markets. The revenue generated by the Union Government will surpass the CTT revenue earned currently.
Reducing Lock-in Period for SGB
The Sovereign Gold Bond (SGB) was launched to encourage the use of financial savings instead of physical gold purchases. This was an effort to move domestic savings into financial assets for safety and growth. However, currently, the lock-in period for SGBs is 5 years. Bringing this down to three years will provide investors with higher liquidity and will attract more people to save and invest in them.
Offering a tax benefit of long-term investment in the event of sale will also be beneficial for individuals and households. The increase in the circulation of money will also help in increasing consumption and investments in the economy.
Shifting Domestic Savings to Financial Instruments
To boost the economy, India needs investments. The funds can either come from foreign direct investment or domestic savings. The easiest way to reduce frictions is to allow people to invest in various financial assets with a simple KYC process.
Another way the Union Government can consider is increasing the limit for investing in tax-saving mutual funds. Currently, the limit is set at Rs. 1.5 Lakhs. Increasing this to Rs. 2 Lakhs can turn out helpful in achieving the objective.
An incentive for Home Buyers
This sector supports employment and ancillary industries such as SMEs and micro, small and medium enterprises. An increase in the number of households wanting to buy a home is beneficial for the entire industry.
With lower interest rates and banks willing to lend, it is the best time for individuals to buy a home. To encourage more people to buy a home, there must be a change in the current regime. At present, the tax benefit on interest on housing loans is Rs. 2 Lakhs whereas for repayment of the principal amount is Rs. 1.5 Lakhs. These limits should be increased by Rs. 50,000 each.
Creating Awareness for Personal Financial Management
While India is home to more than 17 percent of the world’s population, its financial literacy rate is only 24 percent. The majority of India’s population is below the age of 35 years. An awareness created now can go a long way in helping Indians to build a secure future. Personal finance should be taught in school to create a base for citizens who can use their savings to invest in the future. The budget can issue a guideline for policies in this direction.
Incentives for FinTechs
Fintechs are focused on helping the unbanked and underbanked individuals reach financial inclusion. They use various tools and technology to reach out to these individuals. Many Indian FinTechs are trying to work in a location where banking services do not reach.
There must be a framework that provides tax incentives for such companies providing financial services. This would be a very welcome step to attract more startups.
What is FDI?
Funds invested by an individual or an institution located in a foreign country are called Foreign Direct Investment (FDI). FDI is different from FPI (Foreign Portfolio Investment) which involves buying the shares of an Indian company. FDI comprises investing into the business by taking the controlling interest and ownership stakes.
How much is India’s fiscal deficit?
The fiscal deficit of India from April 2021 to November 2021 was around Rs. 7 trillion. The target deficit for FY 2022 was about Rs. 15 trillion. Fiscal deficit is the excess of expenditure spent by India compared to the total revenue earned. It is like a loss to the country, except for the fact that a country cannot make a profit or loss, they are termed as surplus and deficit.
What is commodity transaction tax (CTT)?
Commodity Transaction Tax (CTT) is the tax levied on commodity transactions. It is similar to Securities Transaction Tax (STT) which is levied on the transactions related to shares. CTT is a regulatory charge collected by the Union Government from the commodity traders.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.