Union Budget 2023: Simplification of tax structure especially capital gains tax & withholding tax possible

The Budget 2023 is the last full-year budget of the current government as it will seek re-election in early 2024, and therefore the budget has to take political considerations into account. It will also get presented amidst a difficult macroeconomic environment where countries across the globe are struggling to balance growth and inflation. Therefore, it looks like a very challenging scenario with limited headroom to manoeuvre.

There are a few musts though where budget 2023 is expected to give a push. The first is the increasing ability of the private sector to create employment, which can't happen without significantly expanding the manufacturing sector. The government's push for "atmanirbharta" is likely to reflect in the budget. The PLI scheme may be expanded further beyond the current fourteen sectors with the direct inclusion of MSMEs. The budget 2023 focus on promoting and subsidizing manufacturing start-ups, irrespective of sector, which has export or import substitution potential. It will help in building a supplier base which is essential for the success of any manufacturing economy. The skill set development for manufacturing jobs is another area where government needs to encourage private players.

Another must sector is infrastructure building. Over the last 4 years, the government has been the primary sector for capital expenditure, spending INR 16,05,331 crores between FY-19 and FY-22. Still, there are significant gaps given that participation by the private sector has been tepid. The government needs to bring back the private sector to infrastructure building. While railway and road infrastructure can be built by the government, it is expected the budget 2023 will make support provisions for the private sector to build health infrastructure, urban infrastructure, technology infrastructure and logistics infrastructure. For example, expanding nursing homes and hospitals, developing medical zones or hubs, and building grade A warehouses in tier-2 and tier-3 cities can be brought under a capital subsidy scheme. Further, the discussion on the securitization of infrastructure assets to raise capital has been happening for some time and budget 2023 may look to give it a concrete shape.

Simplification of tax structure especially capital gains tax and withholding tax is also likely to be on the cards. The highest income tax slab rate for income above INR 5 crores, now stands at 42.744% which is significantly high and is likely to prove counterproductive in the long run. This is one area where the slab rate can be brought down. The budget 2023 may also look to change the income tax slabs at all levels to give some relief to the middle class and put more disposable income in their hands, which will further give impetus to the consumption economy.

The biggest challenge for budget 2023 will be to rein in the fiscal deficit. India has kept a target of bringing the fiscal deficit down to 4.5% of GDP by FY-26, which is expected to be 6.4% in FY-23. It needs to find a solution to the burgeoning food and fertilizer subsidy which is about 12% of its total budgetary spend. Nevertheless, India's tax collection has shown a significant increase of about 26% in FY-23 and the government may still be able to bring down the fiscal deficit to below 6% in FY-24.

Although this is an election-year budget, we expect it not only to provide the budgetary provisions for FY-24 but also a vision for the next 25 years when we celebrate the 100th year of our independence.

(The author Mohit Ralhan is the Chief Executive Officer, TIW Capital)