The Budget sets our fiscal policies. Therefore, there were major expectations of initiatives to handle the economic crunch
Finance Minister (FM) Nirmala Sitharaman revealed a wide range of policy initiatives in her Budget speech on February 1 but people paid more attention to the restructuring of income tax slabs because this has a tangible effect which everyone can realise. The Budget was presented in the backdrop of an economic slowdown, decline in consumption and a poor investment environment. Though all the issues cannot be tackled by the Centre alone, the Budget sets the fiscal policies of the Government. Therefore, there were major expectations of some out-of-the-box initiatives by the Centre to handle the current crunch.
Allocation and tax structure: Major tax cuts for the corporate sector were announced five months ago. Therefore, their wish-list included other structural reforms. Though we are yet to see any positive impact of the previous rate cut, the FM has announced abolition of the dividend distribution tax, which will put pressure on collections. Decline in domestic demand and sluggish export are causing underutilisation of production capacity and mere tax cuts will not solve India’s economic problems. If the installed capacity is lying idle, then it makes no sense for any businessman to incur fresh capex and therefore, the dividend distribution tax should have been kept for the time being and this money could have been used for public investment. The Government should have refrained from taking decisions merely on the basis of stock market sentiments because such measures are not going to solve macroeconomic problems. The Economic Survey cautions that higher non-tax revenue is not sustainable year after year.
The Government has factored 10 per cent nominal GDP growth for the coming fiscal while calculating expected tax receipts. Disinvestment proceeds are expected to fetch 2.1 lakh crore, which is too ambitious. That the Government is also aware of the extent of the problem can be seen from the Budget documents in which indirect taxes for the Financial Year (FY) 2020-21 are less than the original estimates for the FY 2019-20. The fiscal deficit target for next year has been kept at 3.8 per cent of the GDP and this is dependent on tax buoyancy projected by the Government and realisation of non-tax receipts (like disinvestment proceeds). If revenue targets are not met, then the Government will approach the market for borrowing, which will negatively affect the bond yield movement. Given the small number of taxpayers who will benefit from the tax slab restructuring, it would be too optimistic to believe that a marginal tax cut would boost consumption. Though this slab restructuring was announced as a measure to simplify the tax structure, it has its own complications as people are expected to give up exemptions which are available now. This announcement can impact domestic savings, which are already declining and have come down to 30.5 per cent of the GDP for FY 2017-18 from 32.1 per cent in FY 2013-14. A fall in domestic savings will make us more dependent on foreign investment.
Budgetary allocations: The FM deserves credit for continuing to push capital expenditure, which has now been set at 1.8 per cent of the GDP as compared to 1.7 per cent during the FY 2019-20. The total investment in roads and highways has gone up more than three times in the five-year period of 2014-15 to 2018-19. The Corruption Perception Index shows that India has significantly improved its ranking, which supports the Centre’s claim of improving governance.
Other policy initiatives: Banks are an important institution for any economy and growth comes from increased monetary activities for which money is provided by financial institutions. But the balance sheet issue is still haunting Public Sector Banks (PSB) and the Economic Survey has highlighted that banks may remain risk-averse unless the Insolvency and Bankruptcy Code proceedings speed up. In 2019, every rupee invested in PSBs led to a loss of 23 paisa, contrary to a gain of 9.6 paisa by private lenders, which tells the story of Government lenders. In January, the Government assured public lenders that prudent commercial decision-making would be protected. Various measures were taken in the past to improve the liquidity situation and now the Budget has proposed to increase the Foreign Portfolio Investment (FPI) limit in corporate bonds from nine per cent to 15 per cent. This will help in the development of a bond market for corporates and increase fund availability and reduce their cost. On the investors’ protection issue, the Budget has proposed to hike deposit insurance cover from 1 lakh to 5 lakh, which was needed for the protection of small depositors.
In the previous Budget, the Sabka Vishwas scheme for settlement of indirect tax-related disputes was announced and the Government is expected to receive 39,500 crore, which is higher than the estimated collection. More than 8.02 lakh crore of income tax dues are under dispute and the new amnesty scheme, Vivad se Vishwas, which was announced on February 1, will minimise litigations. Faceless appeal is also on its way after introduction of faceless assessment and these steps will reduce corruption. Introduction of tax charter and announcement related to decriminalisation of offences under the Companies Act, 2013 are good steps directed towards governance. The Budget contains one out-of-the-box idea relating to tax residency of individuals by amending Section 6 of the Income Tax Act. People used to avoid paying taxes by manipulating their residency status and now they will have to pay it in India if they are not liable to tax in any other country. This is a good step but more such initiatives are the need of the hour.
(The writer is a Chartered Accountant)
