India Trims Fiscal Deficit Target, Rupee Hits Record Low On Capital Gains Tax Hike

(RTTNews) - Sticking to the commitment of fiscal consolidation, India's Finance Minister Nirmala Sitharaman unveiled a budget that aims to provide impetus to job creation, start-ups and small enterprises, while proposals for raising the tax rates on capital gains damped market sentiment and send the rupee to a record low.

The government lowered the fiscal deficit target to 4.9 percent of GDP for the financial year 2025 from 5.1 percent projected in the interim budget announced in February.

This reduction was largely aided by the Reserve Bank of India's huge dividend payout. The government aims to reduce the fiscal deficit below 4.5 percent of GDP by 2025-26.

In her seventh consecutive Budget speech, and also the first in the third term of Prime Minister Narendra Modi, Sitharaman said the government set aside nearly $24 billion for job creation and skill development of youth.

Sitharaman unveiled three new employment linked incentive schemes and programs for skill development.

In a bid to bolster the Indian start-ups, the angel tax for all classes of investors was abolished.

The government endeavor to maintain strong fiscal support for infrastructure over the coming five years, the minister said. The government raised infrastructure investment to 3.4 percent of GDP for FY2025.

The import duty on gold and silver was cut to 6 percent and that on platinum to 6.4 percent.

Sitharaman also proposed to cut the corporate tax rate on foreign companies to 35 percent from 40 percent. Meanwhile, markets reacted negatively as the government raised the long-term capital gain tax to 12.5 percent from 10 percent and short-term capital gains tax was lifted to 20 percent from 15 percent.

Moreover, the security transactions tax on futures and options of securities is proposed to be increased to 0.02 percent and 0.1 percent respectively. Also, the government intends to tax income received on buy back of shares in the hands of the recipient. The Indian rupee weakened to a record low against the US dollar after the government lifted the capital gain tax. The rupee hit 83.68 to the dollar.

The government revised the tax structure under the new Income Tax regime. The changes will help salaried employees to save up to INR 17,500 in income tax, the finance minister said.

Sitharaman said, "India's economic growth continues to be the shining exception and will remain so in the years ahead."

In the economic survey, the government has projected 6.5-7.0 percent real GDP growth in the financial year ending March 2025.

"There is always a chance of fiscal slippage, but recent success in hitting deficit targets suggests the risk is smaller than has been the case previously," Capital Economics economist Shilan Shah said. The economist said the absence of a fiscal blowout will give the RBI scope to loosen policy later in the year once inflation is closer to the 4 percent target.